Focus on cleaning bank books, rather than mergers: Raghuram Rajan

Focus on cleaning bank books, rather than mergers: Raghuram Rajan: In an interview, former RBI Governor Raghuram Rajan elaborates on his stint and nuances of monetary policy...

Business Line Interview: Raghuram Rajan

Excerpts:
"What do you think of the idea of merging the weak banks with stronger ones to contain the NPA mess?
You have to be careful in any kind of merger that you don’t get a big weak bank! You’d hope that the strong bank would clean up the weak bank’s problems but there are very few banks without problems today in the public sector. So, the question you have to ask is are there any dangers in distracting the bankers once again with a new set of issues such as headache with mergers and so on, and not resolving the real problem which is cleaning up their balance sheets.
But there’s this argument that our biggest bank is small by global standards and hence not able to fund mega projects or assume greater risks...


That may well be but at this point your most urgent task is to clean up the banks and recapitalise them. Once they’re on an even keel you can worry about that decision. But tell me, which are the mega projects that are waiting there to get financed by the big banks? It’s not clear to me that our demand for investment is that strong right now. There might well be some obvious mergers, I haven’t been looking at this in close detail. But I wouldn’t use mergers as yet another way to escape the necessity for cleaning up and hope that somehow you put a stronger bank with a weaker bank and figure out a way to clean up. It’s not clear to me that we have that many strong banks to believe that process will magically happen."

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