Government should only Merge strong Public Sector Banks: RBI Deputy Governor

Reserve Bank of India (RBI) deputy governor Viral Acharya on Friday said the government should only merge strong public sector banks (PSBs) while allowing weaker banks to recuperate after adequate recapitalisation.

“Sometimes merging stronger entities with weaker entities leads to bringing down the stronger entity. The calculation has to be right,” he said while speaking at an event organised by Brookings India.

However, Acharya clarified that these are his personal views and do not reflect the views of the central bank.

Giving the example of Bank of America (BoA), which was one of the healthiest banks before the real estate crisis started in 2008, Acharya said BoA weakened significantly after it acquired Countrywide and Merrill Lynch, which had a lot of bad loans.

“My own sense is let the healthy banks merge with each other if consolidation in the sector is the objective. Keep recapitalisation of the weak banks as a separate thing, recapitalise them and then merge them with other healthy banks. Or else you have to do the calculation right so that the healthy bank has so much capital that it can absorb the losses of the weak bank,” Acharya said.

State Bank of India merged the operations of five of its associate banks and Bharatiya Mahila Bank with itself earlier this year, marking the first consolidation move in the sector following the bad loan crisis. The merger has reduced the number of state-controlled banks to 21 from 26.

Acharya said if the government cannot recapitalise PSBs due to its tight fiscal situation, then it should consider privatising some of these banks.

“You still have stakes in these banks even if you can’t recapitalise them. And you can sell these stakes in the market and someone can take over the banks. The regulator should ensure that such private banks remain well capitalised,” he added.

Under the Indradhanush scheme introduced in 2015, the government had agreed to infuse Rs70,000 crore in state-run lenders over four years. They were to receive Rs10,000 crore in 2017-18 and the same amount the following year which analysts consider to be inadequate. The government has so far proposed to infuse Rs8,586 crore in 10 lenders this year, subject to the banks meeting stringent requirements for improving their health.

On the bad bank proposal which was meant to take over all the bad loans of PSBs, Acharya said it is presently not under consideration because it may be difficult for the government to manage a new entity if it cannot adequately recapitalise the existing PSBs.

Sanjeev Sanyal, principal economic adviser in the finance ministry, recently told Mint that the government is looking to reduce the number of public sector banks to 10-15, more than what was envisaged earlier, through a series of mergers and acquisitions so that none of the banks becomes too big to fail.

“Consolidation will not be taken too far to four or five as speculated since the whole system breaks down even if one fails. Eventually, the possible number will come down between 10 and 15. It will be done purely on a commercial basis,” Sanyal said in an interview on 21 August.