Banks must be Merged when Healthy: Raghuram Rajan

Reserve Bank of India’s former governor Raghuram Rajan has questioned government’s move to merge public sector banks. While saying consolidation is not unwarranted, Rajan stressed the government should be clear what purpose would it solve.

In an interview to ET, Rajan said bank mergers would be a complex process. “Consolidation itself requires a whole lot of time and effort by bank CEOs and bank managers throughout the system. You have to merge IT systems, you have to merge cultures, you have to merge HR systems etc that involves a tremendous amount of work,” he said.

He said the fact that banks were already weak would make mergers even more problematic. “You have explain how it is going to be easy to do that. Why this is going to be helpful and not just another distraction which weakens the entire entity,” he said.

The government is keen to reduce the number of PSU banks from 21 to 15 through consolidation so that they achieve economies of scale. Finance minister Arun Jaitley had said that the objective of the merger is to create stronger banks.

Nine banks reported losses of Rs 18,066 crore in FY 2016-17 and nearly six banks are facing restrictions on expanding banking operations. Even among the acquiring banks, junk assets of two banks are close to the regulatory trigger to imposing restrictions. Post -provisions, PNB’s bad loans is 7.8% of total loans, while Canara Bank’s net bad loans is 6.3% as on March 2017.

Banks too have expressed concerns on weakness to the government. As reported by ET, top brass of prominent state-run banks likePNB, Canara Bank and Bank of Baroda, which are positioned as acquiring banks, have set certain pre-conditions to acquire smaller banks. A key condition for taking over peer banks is that the target bank must be making profit. The acquiring banks have also demanded capital from the government, even if the target bank is well-capitalised.

Talking to ET, Rajan also questioned the dominant role of government in mergers. “Are all these plans going to be decided by the North block? If so, if they are all going to be decided by the North Block, isn’t it going to instill sameness in the banks which means we haven’t really moved to the Gyan Sangam requirement that we need to have some differentiation? If North Block decides then where is the differentiation?” he asked.

Banks too hope mergers would be board-driven rather than decided by the government. In the last week of August, the government said that the boards of the bank would have to initiate mergers while a panel of ministers would be set up to examine and give in-principle approval to the consolidation plan.

Rajan said yesterday it is better to do mergers when banks are healthy than when they are unhealthy.

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