Reserve Bank of India Governor Urjit Patel has said the Indian banking system could be better off if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets.
“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,” Dr. Patel said while delivering the Kotak Family Distinguished Lecture at Columbia University here.
He said since there were cooperative banks and micro-financial institutions to provide community-level banking, “some banks can be merged, as a quid pro quo for timely government technical injection.”
Dr. Patel said a challenge that India’s central bank was grappling with was the large stressed banking sector balance sheets.
He noted that 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.
Patel said In the instance of the insolvency and bankruptcy code, the RBI has been preparing actively for the next step in an orderly resolution and this will be undertaken concomitantly with the resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action framework.
“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, Dr. Patel said.
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.
Dr. 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,” he 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.
Dr. Patel said that divestment in public sector banks would have a positive role for the sector.
“Divestment measures would improve overall banking sector health,” he said.
Improved market valuations would create an opportune time for the government to divest some of the ownership in the restructured banks and this would reduce the overall amount that the government needs to inject into them to deal with the problem of NPAs and stressed assets, he said.
Patel said that across the nation, forces were gathering critical mass for the launching of reforms that will help the country achieve a higher growth.
“The materialisation of reforms in the form of rollout of the GST, the institution of Indian Insolvency and Bankruptcy Code and the abolition of the Foreign Investment Promotion Board should boost investor and investment confidence,” he said.
Looking ahead, Patel said India’s economic growth was getting a boost with domestic drivers and was poised to be 7.4 per cent in 2017—18.
“India will remain among the fastest growing economies,” he said, adding that its growth acceleration was reflective of its resilience.
Patel said that inflation was below target, the current account deficit was about one per cent of GDP and fiscal deficit was on path of consolidation that will take it down to three per cent by 2018—19.
He noted that recent sharp decline in inflation was essentially the result of supply shocks.
Giving a comprehensive view of the demonetisation process undertaken by the government, Patel said its positive spillover was reflected in higher financial reintermediation.
The share of low cost current account and savings account deposits in aggregated deposits with commercial banks went up to about 39 per cent, which is a four percentage increase relative to pre—demonetisation period.
“That is a large number on a large base. Financial reintermediation could be one of the biggest collateral benefits of this exercise, but time will tell. It’s too early to tell but initial statistics are interesting,” he said.
In the wake of demonetisation, conventional and unconventional steps undertaken like issuance of short term cash management bills and using the large size of RBI balance sheet helped the central bank to “manage this, otherwise interest rates would have collapsed”, the RBI governor said.
He said there seems to be very little evidence of hysteresis following demonetisation.
“If we had hysteresis, it would have meant some of the bad implications in terms of lower GDP growth etc. but as the demonetisation shock was overtaken by the remonetisation, things have come back to normal,” he said.
Patel stressed that the collateral benefit of demonetisation was faster transmission of monetary policy, which strengthened in the second half of 2016—17.
“Accumulating evidence points to effects of demonetisation being transitory contrary to general perception. GDP slowdown was cushioned by robust consumption and government spending,” he said, adding that despite the demonetisation shock, the GDP growth remained at 7 per cent in Q3 and Q4 as compared to 7.2 per cent and 7.4 per cent in the preceding year.
Patel said it was important to keep in mind that credit was more important than currency.
“Credit was not affected at all. The demonetisation was essentially one mode of payment being temporarily not available to the full extent” but cheque payments were not affected, the mode of payment that banks use to settle their balances was not affected, he said.
“In retrospect, it (demonetisation) would not affect the economy that much because currency while important is still a small part of the transaction instrumentality that is used in a modern economy,” he said.
“So the call market, GSec market, GDP growth, inflation and stock market all showed transitory impact of the demonetisation and the recovery in all these indicators has been swift,” he said.
Cautioning against protectionism, RBI Governor Urjit Patel has said where would giant American corporations like Apple, Cisco and IBM be if they had not sourced the best products and talent from across the world.
“I don’t think that we have heard the last word on US policy talk about this because there is a push back internationally that the world has benefited from an open trading system,” the Reserve Bank of India (RBI) governor said after delivering a lecture here.
He made the remarks in response to a question on the rise of protectionist tendencies in major world economies after he delivered the Third Kotak Family Distinguished Lecture, sponsored by the Raj Center on Indian Economic Policies at the Columbia University’s School of International and Public Affairs.
He said the share prices of the most efficient corporations in the world, including in the US, are where they are because of the global supply chains.
“Where would Apple be, where would Cisco be, where would IBM be if they were not sourcing the best products and talent from across the world. And if policies come in the way of that, then the big wealth creators in a country that advocates protectionism are ultimately affected,” he said yesterday.
Patel said the calls for protectionism in the US were on account of equity and domestic distribution issues which .
“textbook economics tells us should be addressed through domestic fiscal policy” such as taxation and income transfers.
He noted that using trade instruments for protectionism may take a nation on a trajectory different from that of growth.
“Using trade instruments like customs duties, border tax etc is not the most efficient way to do this. In fact you could end up at somewhere else. You do not know what are the implications of some of these policies on equity and distribution besides objectives that you want to address,” he said.
“It should be a domestic policy issue, using domestic fiscal policy if those are the objectives that need to be addressed,” Patel said.
Talking about the Indian Rupee, the RBI governor said it was totally market determined and the intervention by the central bank was only to mitigate volatility.
“I think that is a fair policy for us to follow going forward,” he said.
Asked about the autonomy of the RBI, he said, “We have been imbued with a legislative responsibility of flexible inflation targeting framework only means that that is a plus for the autonomy and independence of the central bank.”
On financial inclusion, he said the most important step that was taken was when every Indian household was given a bank account. He said it was now up to a variety of players including the Non Banking Financial Companies to use that opportunity.
“I think the government should not use its fiscal resources for that. It has used its ownership of the public sector banks to open up these accounts and I think that’s a large subsidy,” he said.
Asked if the federal compromise reached to implement the GST would structurally weaken the tax reform and not reach the potential growth opportunities projected, Patel said the manner in which the GST has been structured as cooperation between the central and the state government was a “great example of fiscal federalism” and that strengthens the GST as a policy.
Patel was also questioned about the troubles and difficulties faced by non—resident Indians in exchanging the old currency notes following demonetisation.
He said it was decided by the government and the RBI that at some point “there has to be an end to the demonetisation exercise.”
“Every country that has done this has followed a certain course and so have we,” he said.
Patel said under Foreign Exchange Management Act regulations people were only allowed to take Rs 25,000 abroad and people were given enough time post—demonetisation.
“We needed to draw a line at some point. I think it has been a fairly generous time,” he said.
On loan waivers, he said such measures do impact the credit culture.
“The honest borrower and the taxpayer pays for this, we need to be very careful with this. There are other micro implications if this amount becomes large, they impact the fiscal situations of the state governments and ultimately could lead to some national balance sheet implications,” Patel said.
He also said that China’s exchange rate policy has become more market determined. PTI YAS ASK ASK 04250941