Raghuram Rajan questions Centre's plan to merge PSU banks

Former RBI Governor Raghuram Rajan on Wednesday questioned Centre's move to consolidate public sector banks, saying the government should be clear on what purpose would PSU banks merger solve.

In an interview to The Economic Times, Rajan said bank mergers would be a complex process. "Consolidation itself requires a whole lot of time and effort by bank CEOs and bank managers throughout the system. You have to merge IT systems, you have to merge cultures, you have to merge HR systems etc that involves a tremendous amount of work."

Stating that the merger of banks that are already under stress due to mounting NPAs would be problematic, Rajan said, "You have explain how it is going to be easy to do that. Why this is going to be helpful and not just another distraction which weakens the entire entity."

Last month, the Union Cabinet approved the framework for merging state-owned banks. The mergers are expected be to bring the number of public sector banks from 21 down to somewhere between 10 and 15.

"The decision regarding creating strong and competitive banks will be solely based on commercial considerations. Our experience of consolidation has been positive. It increases the entity's commercial strength, the ability to absorb market shocks," Finance Minister Arun Jaitley had said.

State Bank of India merged with five of its other associate banks and Bharatiya Mahila Bank to form the 45th largest bank in the world. State Bank of India chairperson Arundhati Bhattacharya had earlier called for more consolidation among the public sector banks, saying this could reduce their dependence on government for capital.