Reddy also said that there should not be too much clamour for cut in interest rates as it would adversely impact bank deposits and push current account deficit (CAD) higher.
"Suppose there is PSB bank A, and if there is a structural problem in bank B; by marrying them, will the structural problem be solved? Thats my answer for bank consolidation," he said while answering questions on bank consolidation on the sidelines of J R D Tata Memorial Lecture organised by Assocham.
The former RBI Governor wondered whether merging a strong bank with another strong one would make the merged entity stronger.
He further noted that if a weak bank is consolidated with another weak bank then it is not sure whether the weak bank would become strong.
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On the demand from industry for a rate cut by the RBI, Reddy said the central bank also needs to take into account the interest of depositors.
When asked about the power being given to the RBI to refer insolvency cases to the National Company Law Tribunal (NCLT), he said under normal circumstances, the bank board should be doing that job but these are extraordinary circumstances and hence it is justified.
However, Reddy added this practice should not continue for long.
Reddy, a former bureaucrat who also served as the RBI Governor between 2003 and 2008, also said recapitalisation of PSBs is a regulatory requirement.
"...There is a difference between past and present. Earlier issuing recapitalisation bond was easier and its complex now," he observed.
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