Banks’ consolidation not a good thing any more: Rajan

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New Delhi: While pressing the Centre to pursue more financial sector reforms, the Prime Minister’s honorary economic advisor Raghuram Rajan has opposed the idea government driving further consolidation in the banking sector, especially among the public sector banks. Speaking on the sidelines of the India Economic Summit of the World Economic Forum on Sunday, Rajan advised the government to stay away from pushing bank consolidation, while arguing that merger proposals should be left to the banks’ boards.

“As far as bank consolidation goes, I am not sure that it should be forced. In fact, I think it is because bank mergers are such a difficult task in general I think banks should figure out how they do it,” he said, responding to queries from FE.

Rajan, a distinguished Professor of Finance at University of Chicago School of Business, also opposed the government strategy of trying to ‘make marriages in heaven’. “Now there is an added twist to this (bank consolidation) issue in India because banks are public sector banks, many of the banks, and it is unclear how the decision making process will take place there. But I would say as far as we can decentralise the process to the banks themselves as opposed to make the marriages in heaven,” he said.

Rajan, though, has suggested the government to push other reforms suggested by the committee, arguing that the financial sector reforms can be a “quick win” for India. He also expressed confidence that the PM was willing to push financial sector reforms and to ensure that long-term financing is available to Indian companies.

“I think clearly there is a whole range of reforms on the capabilities that the prime minister talked about: education, healthcare, agriculture, increasing agricultural productivity. Clearly, also financial sector reforms can be a quick win in terms of our growth,” Rajan said.

“For example, right now we don’t have easy ways of financing long-term infrastructure projects and as he (PM) mentioned clearly making the corporate bond market more effective will be important. I have no doubt that the will to do financial sector reforms for the longer run is there. The details of how to do it, what to push first, how much to push it has to be worked out,” he added.