India to reduce number of banks

Wednesday 11th October 2017 05:53 EDT

Indian Finance Ministry's principal economic advisor Sanjeev Sanyal said the country would have 10-15 public sector banks with government's majority stake, down from 21 at present as part of its plan to consolidate banks. Speaking at the India Economic Summit, he said, “There are something like 21-22 public sector banks. The numbers will be reduced in terms of consolidation, but somewhere to the 10-15 range. We are not going to take it too far down... We need to consolidate some of these large number of banks, but be clear that we are not going to reduce these down to some people think like 4-5 national champions.”

He added, “We recognise that that will lead to too many 'too-big-to-fail' banks. Currently, we have one large bank State Bank of India... We do not want to create a large number of them. Then we will have a real problem in terms of concentration of risks.” Sanyal said consolidation of banks is longer term commercial decisions, whereas recapitalisation of PSBs is “more an urgent issue” in order to get the banking system running again. The RBI has already begun recognising the bad assets, provision them and is taking some of them to bankruptcy and insolvency process. “Now, the second step consequently is recapitalisation and getting these banks running again... that will be done in next few months. The government is fully aware that we need a much larger banking system by factors of multiple than what it is today,” Sanyal said.

He added that India's banking system is way too small for future and needs to be expanded significantly. Recapitalisation bonds is one of the options for infusing capital into banks, he said, adding that the government could also dilute its stake in some lenders to 52 per cent. “There are many options and all of them will be explored in combination.” The ministry, while deciding on the consolidation, will keep in mind factors like regional balance, geographical reach, financial burden and smooth human resource transition. Also, a very weak bank would not be merged with a strong one “as it could pull the latter down”.

Sanyal said the government is moving from “rent-seeking patronage-based economy” to “rule-based, entrepreneur-based economy”.

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