RBI Governor Raghuram Rajan delivered a speech on "Resolving Stress in the Banking Sytstem" at Bangaluru during an interactive meeting with industry and trade.
The government and the RBI are helping our public sector bankers in this difficult time though it is a critical task. Rajan says in the last three years, RBI have paid all the surplus to the government . As such , the proposal of RBI providing capital to banks refects conflicts of interest. He says "This seems a non-transparent way of proceeding"
Govts are sometimes reluctant to infuse bank capital as there are so many more pressing demands for funds However, Rajan says that it is better that government capital be infused quickly in banks.
Rajan says easier monetary policy is no answer to serious distress. He does not endorse the widespread belief in this regard..
Those who diverted money, banks/investigative agencies should send the message that alternatives to repayment can be harsh. We should send message that no one can get away. Glad that the PMO is pushing prosecution of large frauds. Rajan says RBI has set up fraud monitoring cell to coordinate early reporting of fraud cases to investigative agencies He further says bank investors, after initially getting alarmed by the size of the disclosures, have bid up PSB bank shares.
RBI will shortly license a number of new Asset Reconstruction Companies (ARCs) We have coordinated with SEBI to increase penalties for wilful defaulters" .
It is important that banks do not use the new flexible schemes for promoters who habitually misuse the system" "Indebted promoters are being forced to sell assets to repay lenders," .
Rajan says there is still room for upward valuation PSU bank shares if they can improve the prospects of recovery. Process for recovery, despite laws like SARFAESI, is prolonged and costly, especially when banks face well-connected promoters.
Over-borrowed promoters often propose increase in scale so that bank’s outstanding debt and new loans all become serviceable.But if the project is unviable, doubling its size does not make it any more viable. Rajan advises banks not to throw good money after bad money because there is an unreliable promise that debt will become serviceable'
At the same time Rajan has advised banks to censure completion of projects that are viable, even if it requires additional funds infusion.
Rajan says that private banks' interest rate are equal or higher than PSU banks. Yet private banks' credit growth does not seem to have suffered. Need of the hour is to get government banks back into lending to industry and infrastructure , else credit and growth will suffer as economy picks up.He also added that private sector banks cannot substitute fully for the slowdown in public sector bank credit.
Government banks were shrinking exposure to infrastructure/industry from early 2014 because of high past NPAs. It is not that due to high interest rate credit growth has come down. It is remarkable to note that slowdown in credit growth is only in public sector banks not in private sector though RBI prescribed rates applies equally to private and PSUbanks. . Obviously credit growth slowed down mainly because of stress and not because of high interest rate.
The government is said to be considering a mega merger of 26 banks, which will create six big lenders.The proposal envisages major banks like State Bank of India, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda and Bank of India leading the merger.
As a part of the proposal, Syndicate Bank, IOB and UCO Bank will be merged with Canara bank. Central Bank and Dena Bank may be merged with Union Bank, Other banks like Andhra Bank, Bank of Maharashtra, Vijaya Bank will be merged with Bank of India.
However, the management of Bank of India that HR integration will be the biggest challenge during the merger. No bank was free of bad loans and the merger will not help in any way. Merger may help in increasing size of a bank , but cannot help in reduction of NPA or improvement of quality of lending and monitoring of assets
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