Govt to unveil bank consolidation plan soon: Arun Jaitley

Finance minister Arun Jaitley said early days of goods and services tax (GST) going smoother than expected. Photo: Mint

Finance minister Arun Jaitley said early days of goods and services tax (GST) going smoother than expected. Photo: Mint

Mumbai: Finance minister Arun Jaitley said on Friday that the government is working on a strategy for the consolidation of the banking industry to create bigger and stronger banks.

“The consolidation of banks will have to move parallel to the objective of strengthening the banks,” Jaitley said at an event organized by Bloomberg. “We are in advanced stages of coming out with a strategy for consolidation. The objective of consolidation is to create a bigger and stronger bank. I would prefer a strong bank merging with a strong bank than a weak bank merging with a weak bank.”

Banks in India are weighed down by Rs10 trillion of stressed assets, limiting their ability to advance fresh loans. Lack of demand for corporate credit, meanwhile, has led to loan growth declining to multi-year lows of around 5%. The government has in the past favoured bank mergers as a way out of the mess, but Jaitley’s remarks are the strongest indication of the seriousness of intent with which it is proceeding.

“Bad loans is a legacy that we have inherited,” said Jaitley.

It was a reference to the economic boom years when corporate entities borrowed heavily to invest in big-ticket projects that were stalled by an eventual slowdown, which squeezed their cash flows and hurt their ability to repay debt.

The country is now saddled with a so-called twin balance sheet problem—bank bad loans and corporate debt.

Fitch Ratings said in a report on 12 September that the government will have to pump additional capital into public sector banks to aid effective bad loan resolution and revive loan growth.

According to the rating agency, Indian banks need additional capital of $65 billion to meet Basel III capital norms, which will be fully implemented from the end of March 2019. The government has budgeted $3 billion in fresh equity for 21 state-owned banks over the current and next fiscal years.

“India and the world must rest assured that policymakers and the government of India are conscious of this responsibility… to support our banking system, to support the necessary policy changes required to respond to these challenges so that the position we gathered as the fastest growing major economy in the world for three years in a row can be maintained,” Jaitley said.

In a speech to the Indian Banks’ Association earlier on Friday, Jaitley pledged to support banks’ efforts to tackle bad loans.

“…the government certainly stands one with the banking system,” Jaitley said at the annual general meeting of the association. “Whatever steps that are required to be taken to find a resolution to this problem, we will expeditiously work with India’s banking system in order to strengthen it.”

The government is also seeking to lift economic growth that decelerated to 5.7% in the quarter ended June—the slowest pace in three years. Jaitley said this week that the government was working on a package of economic measures to boost growth. That has prompted concern among some economists that fiscal prudence may be compromised.

“How do you maintain the balancing act between continuing to spend in an economy, continuing to support your banks and at the same time maintain the best standards of fiscal prudence,” Jaitley said on Friday. “I think the last part is the current challenge that we are facing. This seems to be the logical course in order to get back (economic growth). I don’t think there is need for panic. There’s a need for analysis and for responsive action to this and we are fully prepared for this.”

Jaitley also spoke about Air India’s privatization, which he said was on course.

“Always remember, privatisation is the art of the possible,” he said. “And therefore, it’s an exercise which has to be transparent, acceptable to a cross-section of the public and political opinion…The prospective buyer or the universe of buyers must be such that their identity itself inspires confidence.”