Weak banks pose systemic risks: FM

Finance Minister P Chidambaram said consolidating public sector enterprises would allow economies of scale and bring in better management in the sector.

Replying to a question in the Lok Sabha on the consolidation of government-owned banks , he said, "Larger size also entails better management of risk. Small and weak banks pose systemic risks with their low capital adequacy ratio and high non-performing assets."

In response to a supplementary, he said no decision had been taken on consolidation as yet.

He said consolidation was a timely response to augment efficiency, which would lead to income generation and add to the gross domestic product of the country.

Chidambaram said both gross and net non-performing assets had been declining. Public sector banks had become stronger in the past few years, he added and said none of the consolidated banks had incurred losses.

On the question of reducing costs and downsizing of banks raised by Nikhil Kumar of the Congress, he said the government did not give instruction to banks on the introduction of the voluntary retirement scheme. The bank managements had to decide on whether they wanted to offer the scheme, he said.

The minister praised the recent wage agreement between banks and their employees, stating that it also took care of management issues.

He said steps taken up by the government to improve the functioning and profitability of the nationalised banks included the enactment of a law for effective recovery of non-performing assets, deregulation of interest rates, introduction of prudential norms and organisational restructuring.