Sounding a note of caution on bank consolidation, former RBI Governor Y V Reddy on Friday said there is a need to take 'appropriate' decision in this regard as by simply merging a strong bank with a weak one will not produce the desired result.
Reddy also said that there should not be too much clamour for cut in interest rates as it would adversely impact bank deposits and push current account deficit (CAD) higher.
“Suppose there is PSB bank A, and if there is a structural problem in bank B; by marrying them, will the structural problem be solvedIJ Thats my answer for bank consolidation,” he said while answering questions on bank consolidation on the sidelines of J R D Tata Memorial lecture organised by Assocham. Reddy further said the right question to ask should be “whether in that particular case it (merger) is appropriate”.
The former RBI Governor wondered whether merging a strong bank with another strong one would make the merged entity stronger.
He further noted that if a weak bank is consolidated with another weak bank then it is not sure whether the weak bank would become strong.
The government had set up a Alternative Mechanism (AM) headed by Finance Minister Arun Jaitley to oversee the consolidation in the public sector banks.