Merger of PSU banks could help banking system, says Patel
Reserve Bank of India (RBI) governor Urjit Patel on Monday 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 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.
Since there were cooperative banks and micro-financial institutions to provide communitylevel 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 balance sheets, he added.
Stating that a series of measures have been taken in the past year to resolve the problem of non-performing assets (NPAs), including completion of a comprehensive asset quality review of banks, Patel said: “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 consolidation of banks could also entail the sale of real estate where branches are redundant, he added. “The weaker banks are losing market share (and) that is a good thing, particularly 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.”
Giving a comprehensive view of demonetisation, Patel said its positive spillover was reflected in higher financial reintermediation. The share of low cost current account and savings account deposits in aggregated deposits with commercial banks went up to 39%, four percentage increase relative to the pre-demonetisation period. “That is a large number on a large base. Financial reintermediation could be one of the biggest collateral benefits of this exercise.”