Amid growing concern on solving the issue of widespread NPAs and talk of consolidation gaining momentum, the Reserve Bank of India Governor Urjit Patel has pitched for having fewer but healthier banks by merging public sector lenders. The Indian banking system can do better if some of the public sector banks are merged so that there are fewer but healthier banks, he said earlier this week at an event in New York.
“As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks,” Patel said.
Patel further said that RBI, India’s central bank, is facing a challenge from the large stress showing in the balance sheets of the banking sector. He said that in this regard, a series of measures have been taken in the past year on resolving the problem of the non-performing assets (NPAs), including completion of a comprehensive asset quality review of the banks.
“One of the things that the public sector banks need to do is to raise private capital from the market and not rely on government largesse,” he said. Public sector banks have to be required to share the burden of recapitalising, Patel said further. This will be a good way to restore some market discipline and get the banks and their shareholders to more seriously care about management decisions, he said.
Patel also said that consolidation of banks could also entail sale of real estate where branches are redundant as well as offering voluntary retirement schemes to manage headcount and adding younger, digital savvy personnel.
“The weaker banks are losing market share (and) that is a good thing,” Patel said. “The stronger banks are gaining market share, which is a good thing, particularly the private sector banks. In a way it is working; those who need to shrink are shrinking. “Lenders who are stronger are gaining more market share. I think there is a nice shift happening and we need to work with that to resolve this,” he said.