Sounding a note of caution on bank consolidation, former RBI Governor Y V Reddy today said there is a need to take 'appropriate' decision in this regard as by simply merging a strong bank with a weak one will not produce the desired result.
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.
Reddy further said the right question to ask should be "whether in that particular case it (merger) is appropriate".
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.
The government had set up a Alternative Mechanism (AM) headed by Finance Minister Arun Jaitley to oversee the consolidation in the public sector banks (PSBs).
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.
"If savers will desert banks then there will be no lending. If savings won't catch up then our current account deficit (CAD) will go up...If current banking problem is because banks are choked then reducing interest rates would not increase economic activities," he said.
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.
"The government is providing extraordinary package to PSBs to deal with extraordinary situation, so who will bear burden will depend on how recapitalisation bonds will be designed.
"...There is a difference between past and present. Earlier issuing recapitalisation bond was easier and its complex now," he observed.
Disclaimer: No Business Standard Journalist was involved in creation of this content
