Urjit Patel for public sector bank mergers, says need fewer but healthier banks

Urjit Patel for public sector bank mergers, says need fewer but healthier banks

New York: RBI Governor Urjit Patel has said the Indian banking system could be better off if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets.

“As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks,” Patel said while delivering the Kotak Family Distinguished Lecture at Columbia University here.

He said since there were cooperative banks and micro-financial institutions to provide community-level banking, “some banks can be merged, as a quid pro quo for timely government technical injection”.

Patel said a challenge that India’s central bank was grappling with was the large stressed banking sector balance sheets.

He noted that a series of measures have been taken in the past year on resolving the problem of the non-performing assets (NPAs), including completion of a comprehensive asset quality review of the banks.

Patel said in the instance of the insolvency and bankruptcy code, the Reserve Bank of India (RBI) has been preparing actively for the next step in an orderly resolution and this will be undertaken concomitantly with the resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action framework.

“One of the things that the public sector banks need to do is to raise private capital from the market and not rely on government largesse,” he said.

Public sector banks have to be required to share the burden of recapitalising, Patel said.

This will be a good way to restore some market discipline and get the banks and their shareholders to more seriously care about management decisions, he said.

Patel also said that consolidation of banks could also entail sale of real estate where branches are redundant as well as offering voluntary retirement schemes to manage headcount and adding younger, digital—savvy personnel.

“The weaker banks are losing market share (and) that is a good thing,” Patel said.

“The stronger banks are gaining market share, which is a good thing, particularly the private sector banks. In a way it is working; those who need to shrink are shrinking.

“Lenders who are stronger are gaining more market share.

I think there is a nice shift happening and we need to work with that to resolve this,” he said.

Patel said that divestment in public sector banks would have a positive role for the sector.

“Divestment measures would improve overall banking sector health,” he said.

“The materialisation of reforms in the form of rollout of the GST, the institution of Indian Insolvency and Bankruptcy Code and the abolition of the Foreign Investment Promotion Board should boost investor and investment confidence,” he said.