Promises are extremely easy to make for a politician. The problem, however, lies in delivering on them. Tougher still is to do so in a time-bound manner. The coming Union budget provides Finance Minister Arun Jaitley that one near-term opportunity to walk the talk, and make good his words. Mr. Jaitley appears to be acutely aware that time is ticking away. He also understands that any dithering on the reform front would drastically impair the chances of a quick economic recovery for the country. Realising the exceptional predicament he finds himself in at the moment, the Finance Minister hinted at a series of banking reforms while addressing a session at Make in India Week in Mumbai on Sunday. The Indian banking system is in crisis at the moment with bank after bank, especially the government-owned ones, reporting hefty losses in the face of mounting bad loans. The Reserve Bank of India’s ordained clean-up notwithstanding, the banking system desperately needs to be pulled permanently away from the legacy elements that have played havoc for long. “The government is committed to zero interference and letting the institutions run professionally,” Mr. Jaitley said in Mumbai. “And the boards of the banks have to be run professionally.” He went on to assert that the government would ensure the banks worked purely on professional considerations. At the same time, he felt that the country had not reached a stage where the government could pull out of the banking system altogether. “If you see the last three-four decades, state-owned banks have played an important role as they reached out to areas where there was no banking,” he said. No doubt, the banking system remains out of bounds for far too many underprivileged sections. However, oftentimes this fact has been conveniently used to perpetuate the government’s hold over the banking system. Reducing its financial stake in state-owned banks can, at best, help fill the coffers of the government. It does not, however, unburden the government of the problem of conflict of interest. History is replete with instances of subtle and not-so-subtle interference by the government in the banking system, resulting in decisions based on partisan, populist or simply expedient considerations.
If the zero-interference assurance given by Mr. Jaitley has to have any meaningful and practical implication, the government would do well to at least reconfigure its financial stake in the banking industry. This could be done by ring-fencing the government’s equity stakes in banks by transferring its shares into an independent, professionally-managed holding company. In an integrated global environment, financial decision-making has become an increasingly complex process involving very many dynamic imponderables. Given that fact, banks will be well-served if they are allowed to carry on their businesses without somebody interfering in their work time and again. The circumstances are currently ideal for Mr. Jaitley to break new ground in the banking field.