Vinod Rai, the veteran bureaucrat appointed this year to run the new Banks Board Bureau said that the India’s state-owned banks now need to merge into half a dozen well-capitalised institutions than can underwrite economic growth.
He said that the government stood ready to inject fresh funds beyond the money earmarked in the 2016-17 budget. In the current budget, the government has put in about 25,000 crores ($3.7 billion)
Restoring banks to health is vital to revive lending, investment and create jobs for the million young Indians who join the labour market each month.
Stronger banks should decide which of their bad loans to shift off their balance sheets, while weaker banks need fresh capital before a round of consolidation that would cut the number of state banks to no more than six from 27 now.
The government set up the Banks Board Bureau in April to drive balance sheet improvement and consolidation the sector. It will evolve into an investment holding company for state-owned banks, shielding them from political interference in management appointments and lending decisions.
1. State banks which account for around 70 per cent of lending in Asia’s third largest economy, hold most of India’s $120 billion in troubled loans after a lending spree under the last government hit trouble.
2. Reserve Bank of India Governor Raghuram Rajan has set a deadline of March 2017 to clean up the sector.
1. Mr. Rai, said that the consolidation has already begun with State Bank of India’s move to absorb five subsidiaries and Bharatiya Mahila Bank, a bank for women set up in 2013.
2. He expects more mergers but declined to be specific on timeframes.
Taking a haircut:
According to him, India’s state banks have been reluctant to write down loans, especially to high-profile borrowers like liquor tycoon Vijay Mallya. To solve such issues govt. intends on creating a separate mechanism to review such cases and recover the dues.