Banks should be merged when they are healthy, says ex-RBI Governor Raghuram Rajan.

Former RBI Governor Raghuram Rajan puts question marks on Government’s move to merge public sector banks. He said that the government should be clear on purpose of merging public sector banks. What purpose would it solve ?

Bank mergers would be complex : Rajan

In an interview to The Economic Times, 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 that the merger of weak banks 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.

Government put the bank merger on fast track, setup alternative mechanism

Last month, the Union Cabinet approved the framework for merging state-owned banks. The mergers are expected be to bring the number of public sector banks from 21 down to somewhere between 10 and 15.

“The decision regarding creating strong and competitive banks will be solely based on commercial considerations. Our experience of consolidation has been positive. It increases the entity’s commercial strength, the ability to absorb market shocks,” Finance Minister Arun Jaitley had said.

State Bank of India merged with five of its other associate banks and Bharatiya Mahila Bank to form the 45th largest bank in the world. State Bank of India chairperson Arundhati Bhattacharya had earlier called for more consolidation among the public sector banks, saying this could reduce their dependence on government for capital.

Rajan questions role of Government in bank mergers

Talking to Economic Times, 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. 

Banks should be merged when they are healthy, says ex-RBI Governor Raghuram Rajan.