Tarapore cautions on bank merger plans

MUMBAI, April 30: Former Reserve Bank of India deputy governor and member of the Narasimham Committee SS Tarapore has said that the merger o...

MUMBAI, April 30: Former Reserve Bank of India deputy governor and member of the Narasimham Committee SS Tarapore has said that the merger of banks in the public sector should wait until the issue of 51 per cent government ownership is resolved.

While delivering the Sir Purshotamdas Thakurdas Memorial Lecture organised by the Indian Institute of Bankers in Mumbai on Thursday, Tarapore said that the merger of strong banks with weak ones should be ruled out since such mergers would only accentuate weaknesses. He said that such mergers to be meaningful should produce leaner and more efficient organisations. "…the new whole should be far superior to the sum of the erstwhile parts," said Tarapore.

Tarapore said that the RBI, as a regulatory supervisor, should withdraw its directors from the boards of public sector banks, adding that the regulator should not be an owner of banks and financial institutions. "The RBI cannot be a player and a referee," he said.

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Tarapore called for an amendment to the SBI Actto rescind the stipulation of a minimum holding of 55 per cent by the RBI in the capital of SBI. "It does not make for good governance that the government, which is not the owner of SBI, exercises proprietary rights. There is a strong case for scrapping the SBI Act and corporatising the SBI," said Tarapore.

Tarapore also stressed on the need to stop channeling government subsidies through banks. "The banking system should not be the vehicle of providing a subsidy and government-sponsored programmes combining loans and subsidies should be terminated," he said.

"Interest rates on loans up to Rs 2 lakh by commercial banks should be totally deregulated," said Tarapore. He said that it has now been clearly established that what is vital is timely and adequate credit and not the cost of credit. "Priority sector, to be meaningful, needs to be restricted to very specific target groups, say small borrowers, of Rs 2 lakh and below," he added. Speaking on the regulatory framework that needed to be evolved fornon-banking finance companies (NBFCs), Tarapore said that a framework should be so evolved that there would be an incentive for NBFCs to amalgamate and for them to convert themselves into banks.

"Deposit taking is essentially a banking function and should remain so. The provision of deposit insurance for NBFCs would give precisely the wrong signal that such deposits are as safe as those with banks," he said. Tarapore said that the authorities should therefore not accede to the demands of deposit insurance for NBFCs.

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As regards the weaker banks, Tarapore said that the government should take a conscious decision not to put in any further capital either directly or indirectly into those banks that cannot raise capital in the market. "The principle should be to let the NPAs lodge in the organisation of origin and an artificial balance sheet clean-up should be eschewed," he said.