By Sunny Verma
Differences have cropped up between the PM s honorary economic advisor Raghuram Rajan and the finance ministry over bank consolidation. Rajan, who had chaired a committee on financial sector reforms, is understood to have opposed further consolidation among public sector banks. Rajan has argued against the government driving consolidation in the sector, maintaining that it should be left to the bank boards to decide. I am not persuaded that it is a good thing to have more consolidation. The difficulties associated with bank mergers are often underestimated , he wrote to the PMO in early October while presenting a list of doable reforms a sharply truncated version of the reforms committee recommendations. Rajan s view contained in his letter to the PMO is somewhat different from the committee s recommendation, which said, to the extent that takeovers of Indian banks do not raise issues of excessive concentration or stability, they should be permitted. Pranab Mukherjee, in his first meeting with the PSB chiefs after taking charge as the finance minister, had said consolidation might be needed to improve the global competitiveness of Indian banks and to reduce the risk to financial stability. At the meeting today, I had emphasised that the PSBs should look at consolidation as a serious option in order to reduce risk to finanial stability and to face competition, the FM had said in June. Any consolidation initiative in the banking sector would be viewed positively and government, as a majority shareholder, would continue to play a supportive role in the process , he had said. Rajan s opposition comes at a time when the government is facilitating the biggest marriage among the State Bank of India (SBIN.NS : 2242.9 -11.75) and its seven associate banks. The government last month approved SBI taking over State Bank of Indore. SBI has already acquired the State Bank of Saurashtra, the smallest of its associates. A senior government official familiar with the matter told FE that there is some opposition to SBI s consolidation from certain sections who argue it will increase the concentration risk by substantially pushing up its market share. He, however, said there is no change in the government s thinking and it will continue to support merger proposals coming from banks. The government and the RBI, meanwhile, appear to have rejected most recommendations of the Rajan committee. Except agreeing to branch-delicensing and examine a proposal to trade priority sector loans, the RBI is learnt to have put on hold various suggestions. The suggestions on the backburner include having a single objective for monetary policy, reducing government ownership in PSBs below 50% and raising FII investment in the government securities and corporate bond market. The RBI, though, is understood to have agreed to examine a proposal to give 15 fresh small banking licences to reputed promoters willing to make use of the core banking solutions technology. On the monetary policy objective, the committee suggested, The RBI should formally have a single objective, to stay close to a low inflation number, or within a range, in the medium term and move steadily to a single instrument. This too hasn t found favour, particularly since the RBI s multiple-objective approach and its focus on financial stability has been viewed positively after the global economic crisis. The government is also not impressed by the idea of bringing in outside strategic investors into the PSBs and reducing its stake below 50% while retaining control. The RBI, though, has been liberalising its banking correspondent model for financial inclusion which was suggested by the committee. The idea of opening up the Indian debt market to foreign investors has been put on hold. The government has also shelved the suggestion to treat foreign banks on a par with the Indian banks. On the suggestion of making priority sector loans tradable, the RBI has decided to set up a working group to study the merits of the proposal. Allow banks that undershoot their priority sector obligations to buy the priority sector loan certificates and submit it towards fulfilment of their target, the committee said. The RBI has also liberalised setting up ATM branches by banks.
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) and its seven associate banks. The government last month approved SBI taking over State Bank of Indore. SBI has already acquired the State Bank of Saurashtra, the smallest of its associates. A senior government official familiar with the matter told FE that there is some opposition to SBI s consolidation from certain sections who argue it will increase the concentration risk by substantially pushing up its market share. He, however, said there is no change in the government s thinking and it will continue to support merger proposals coming from banks. The government and the RBI, meanwhile, appear to have rejected most recommendations of the Rajan committee. Except agreeing to branch-delicensing and examine a proposal to trade priority sector loans, the RBI is learnt to have put on hold various suggestions. The suggestions on the backburner include having a single objective for monetary policy, reducing government ownership in PSBs below 50% and raising FII investment in the government securities and corporate bond market. The RBI, though, is understood to have agreed to examine a proposal to give 15 fresh small banking licences to reputed promoters willing to make use of the core banking solutions technology. On the monetary policy objective, the committee suggested, The RBI should formally have a single objective, to stay close to a low inflation number, or within a range, in the medium term and move steadily to a single instrument. This too hasn t found favour, particularly since the RBI s multiple-objective approach and its focus on financial stability has been viewed positively after the global economic crisis. The government is also not impressed by the idea of bringing in outside strategic investors into the PSBs and reducing its stake below 50% while retaining control. The RBI, though, has been liberalising its banking correspondent model for financial inclusion which was suggested by the committee. The idea of opening up the Indian debt market to foreign investors has been put on hold. The government has also shelved the suggestion to treat foreign banks on a par with the Indian banks. On the suggestion of making priority sector loans tradable, the RBI has decided to set up a working group to study the merits of the proposal. Allow banks that undershoot their priority sector obligations to buy the priority sector loan certificates and submit it towards fulfilment of their target, the committee said. The RBI has also liberalised setting up ATM branches by banks.
