New York: Reserve Bank of India (RBI) governor Urjit Patel has favoured consolidation of some public sector banks to create fewer but healthier banks and resolve 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, delivering the Kotak Family Distinguished Lecture at Columbia University.
India has cooperative banks and microfinance institutions to provide community-level banking, and “some banks can be merged as a quid pro quo for timely government technical injection”, said Patel.
Five associate banks of the State Bank of India (SBI) and the Bharatiya Mahila Bank became part of SBI on 1 April in a merger seen as the likely first step in the consolidation of India’s banking system, weighed down by Rs7 trillion of stressed assets.
Patel said bank consolidation could entail the sale of real estate where branches become redundant as well as offering voluntary retirement schemes to manage headcount.
“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.”
Patel said RBI had been preparing actively for the next step in an orderly resolution of stressed assets—the legacy of an economic slowdown, together with delayed statutory approvals, which stalled projects, squeezing cash flows and making it difficult for borrowers to repay debt.
“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,” the RBI governor said, adding that state-owned banks have to share the burden of recapitalization.
Patel said divestments in public sector banks would be positive for the banking sector. Improved market valuations would create an opportunity for the government to divest some of its ownership in the restructured banks and this would reduce the overall amount that the government needs to inject into them to deal with stressed assets.
The central bank chief said the cash ban imposed in November probably had no more than a temporary effect on the economy, as lending continued to flow. The “accumulating evidence points to” the effects of so-called demonetization as “transitory”, Patel, who took over from Raghuram Rajan in September, told an audience. “Credit is more important than currency, and credit was not affected at all.”
Authorities have been seeking to rein in liquidity after the government’s November recall of high-denomination currency notes flooded the banking system with cash. The excess funds not only threaten to stoke inflation, but have also constrained the RBI’s ability to intervene at a time when the rupee is rallying.
Households’ inflation expectations “continue to be adaptive and therefore difficult to bring down in a durable manner”, said Patel.
In a bid to burnish RBI’s credentials as an inflation-fighting central bank, Patel has called for “close vigilance” on inflation. Consumer prices rose 3.81% in March from a year earlier, having risen 3.65% in February. RBI targets keeping inflation around 4% in the medium term.