Reserve Bank Governor Urjit Patel says that merging public sector banks and having fewer of them would be better for the sector and also help deal with the problem of non-performing assets (NPA).
Do we need so many public sector banks, he asked while delivering the Kotak Family Distinguished Lecture at Columbia University on Monday. It is better to consolidate them into fewer banks, he said.
Some of these banks can be merged in return for government assistance in taking care of the NPA problem and this would also make them more efficient, he said.
There was already a trend in that direction, according to him.
"The weaker banks are losing market share (and) that is a good thing," Patel 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," he added. "I think there is a nice shift happening and we need to work with that to resolve this."
The merger of banks would lead to savings through consolidation of bank branches and operations, he said.
Some of the employees could be offered buyouts, he said adding that younger, digital-savvy personnel can be hired to further expand digital banking operations.
Patel also 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 NPA problem, he added.