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Merger of state-run banks ‘right move but not at the right time’, says Raghuram Rajan

Former RBI governor Raghuram Rajan says amid the economic slowdown and bad loans crisis, banks will have to focus on mergers instead of better loans.

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New Delhi: The recent merger of 10 state-run banks into four entities was “unnecessary”, given that the economy is in a downturn and these banks are grappling with high levels of bad debt, former Reserve Bank of India governor Raghuram Rajan has said.

Delivering the O.P. Jindal lecture at Watson Institute, Brown University, on 9 October, Rajan pointed out that mergers take a lot of time and are a ‘big headache’, adding that the mergers are probably the “right move”, but not at “the right time”.

“Bank mergers are coming at a time when the banks are dealing with high levels of NPAs and at a time the economy is slowing… Banks are going to be engulfed in managing the mergers over the next few years instead of focusing on making better loans,” he added.


Also read: Mega mergers fail to lure investors to public sector bank stocks


The government announced the merger in August and said that it will help ease the credit flow to the economy. It proposed to merge Oriental Bank of Commerce and United Bank of India with Punjab National Bank, Syndicate Bank with Canara Bank, Andhra Bank and Corporation Bank with Union Bank of India, and Allahabad Bank with Indian Bank.

However, mergers are a time-consuming process, as evidenced by the merger of Vijaya Bank and Dena Bank with the Bank of Baroda last year.

The banks and the government had anticipated the merger to be complete by the start of the current financial year, but complete integration is likely to be completed only by 2021.


Also read: Shares of PNB, Canara, Union Bank of India & Indian Bank plunge after govt’s merger plans


MSMEs and loan melas

Rajan also flagged the government mandates imposed on state-run banks, like lending to micro, small and medium enterprises and loan melas, which result in bad debts.

“Lending to MSMEs hasn’t been turning out particularly well,” he said, adding that the regulatory forbearance given to MSME loans going bad is “an attempt to try and not recognise the problem”.

The RBI, in January this year, had allowed for one-time restructuring of stressed loan accounts of MSMEs.

Rajan also questioned the level of credit assessment that takes place at loan melas before the loan is sanctioned. The idea of loan melas in 400 districts was floated by the government last month to maximise disbursement of retail, agricultural and MSME credit during the festive season.

State-run banks were given a target of bringing in five customers for each existing customer, leading to worries that the banks may lend indiscriminately only for these loans to turn into NPAs later.

Rajan also recommended bringing in governance reforms in state-run banks and attracting the right talent through competitive salaries.


Also read: Merger of banks raises more questions than solutions it offers India’s slowing economy


 

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