RBI Governor Raghuram Rajan cautions against merger of unhealthy banks

Written by fe Bureau | New Delhi | Updated: Aug 14 2014, 04:09am hrs
Raghuram rajan'If you merge two unhealthy banks, you create a big unhealthy bank which will create bigger problems for the economy.' (Photo: AP)
Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday cautioned against the merging public sector banks as a means of solving the issues of governance and higher non-performing assets.

Speaking during a question and answer session of a literature fest, Rajan said that the government is looking at options for mergers but still needs to be careful.

If you merge two unhealthy banks, you create a big unhealthy bank which will create bigger problems for the economy. If you merge an unhealthy bank with a large healthy bank, and the large healthy bank is not able to swallow the problems and will land the large healthy bank in problems, Rajan said.

Speaking on the governance issues, Rajan called for the separtion of the functions of the chairman and CEO of the public sector banks I think the government and the RBI are together are working on improving governance, because it is government's prerogative because they own it. But as a stability regulator, we also have to figure out and offer suggestions on how this can be done. There are well known remedies that have been out there, such as sparating the chairman and CEO and have stronger boards. There are also suggestions on improving the quality and capapbility of the personnel..

Rajan also added the need for an operational bankruptcy code for companies and stressed on clearing on confusion on how debt and equity is viewed in companies. We need equity to be seen as equity and debt to be seen as debt. Today there's a lot of confusion on what is what and often debt looks like equity and absorbs the hit and equity looks like debt because it's senior to the debt holders . We need that confusion to be changed, Rajan explained.

The Governor also reiterated his position on not cutting interest rates as a means to quell demand. So when I raise interest rates I do keep an eye on demand. That's why I've set this glide path. Let us keep interest rates high enough that they quell high demand, but we also bring inflation down steadily without a dramatic disinflation over a quarter or so, Rajan added.