Banks must be merged when healthy: Former RBI Governor Raghuram Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajan gestures as he answers a question from the audience after delivering his keynote address at the "Advancing Asia: Investing for the Future" conference in New Delhi, India, March 12, 2016. REUTERS/Anindito Mukherjee - RTX28TO6

Public sector bank mergers must take place when the banks are healthy while most of them are yet to clean up their balance sheets, said Raghuram Rajan, former Reserve Bank of India governor.

Rajan, whose three-year term as the central bank chief ended a year ago, has released his book “I Do What I Do” based on a compilation of his speeches and his commentary on the reform, rhetoric and resolve.

Taking questions on the bank mergers from the audience, Rajan said, “You have to be careful because mergers take time and consume a lot of time from the senior management and banks are different entities with different geographies and culture.”

According to him, it is better to merge banks when they are healthy, bring in the management capacity and then contemplate mergers because when unhealthy, more time has to be spent on cleaning the balance sheets.

The government and RBI are discussing consolidation in the banking sector to have fewer public sector banks. However, most public sector banks are grappling with huge bad loans and capital constraints leading to weaker balance sheets.

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RBI's Independence

The former RBI head also mentioned that he was against making RBI completely independent as it already enjoys a lot of freedom. “RBI cannot work in contra-purpose with the government but in certain functions such as regulation, supervision and on monetary policy, we should make sure we don’t compromise.”

Insolvency and Bankruptcy Code

Rajan, who never minces words, also said that the new Insolvency and Bankruptcy law to fight bad loans is a good reform but care should be taken that big borrowers do not exploit the loop holes and delay the process of debt resolution.

“The shadow of Insolvency and Bankruptcy code makes bank re-negotiation much easier. During my time, we worked without that shadow. There is still an issue that needs to be resolved and the government is working on it, that every loss taken by banks will not be met by an inquiry from investigative agencies.

“Banks need to be protected from inquiry on commercial decisions and that they have the confidence to take those decisions,” Rajan added.

Hinting that he is open to taking up another position in any other form when asked that being back in academia, would he be open to a candy shop he said he is “always open to candy”.