Most Rajan ideas put on back burner

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New Delhi: Differences have cropped up between the PM’s honorary economic advisor Raghuram Rajan and the finance ministry over bank consolidation. Rajan, who had chaired a committee on financial sector reforms, is understood to have opposed further consolidation among public sector banks.

Rajan has argued against the government driving consolidation in the sector, maintaining that it should be left to the bank boards to decide.

“I am not persuaded that it is a good thing to have more consolidation. The difficulties associated with bank mergers are often underestimated”, he wrote to the PMO in early October while presenting a list of ‘doable reforms’—a sharply truncated version of the reforms committee recommendations.

Rajan’s view contained in his letter to the PMO is somewhat different from the committee’s recommendation, which said, “to the extent that takeovers of Indian banks do not raise issues of excessive concentration or stability, they should be permitted.”

Pranab Mukherjee, in his first meeting with the PSB chiefs after taking charge as the finance minister, had said consolidation might be needed to improve the global competitiveness of Indian banks and to reduce the risk to financial stability.

“At the meeting today, I had emphasised that the PSBs should look at consolidation as a serious option in order to reduce risk to finanial stability and to face competition,” the FM had said in June.

“Any consolidation initiative in the banking sector would be viewed positively and government, as a majority shareholder, would continue to play a supportive role in the process”, he had said.

Rajan’s opposition comes at a time when the government is facilitating the biggest marriage among the State Bank of India and its seven associate banks. The government last month approved SBI taking over State Bank of Indore. SBI has already acquired the State Bank of Saurashtra, the smallest of its associates.

A senior government official familiar with the matter told FE that there is some opposition to SBI’s consolidation from certain sections who argue it will increase the concentration risk by substantially pushing up its market share. He, however, said there is no change in the government’s thinking and it will continue to support merger proposals coming from banks.