Mumbai: Amidst talks of consolidation in the banking sector, Reserve Bank of India Governor Raghuram Rajan has said merging strong banks will bode well for the economy and that one needs to be "very careful" in deciding who to merge with whom.
"One has to be very careful in deciding who to merge with whom. The best of all where you merge strong banks together because they have the resources, health and culture, and they will not have any problems to fix other than merger itself," Mr Rajan said at an event in Mumbai on Wednesday.
Finance Minister Arun Jaitley in his Budget speech had said, "There have been some suggestions for consolidation of public sector banks. Government, in principle, agrees to consider these suggestions."
Financial Services Secretary G S Sandhu had recently said that the process of consolidation will be started within SBI Group.
Mr Rajan said that if two unhealthy banks are merged, the created entity will also be unhealthy and it could create a bigger problem in the economy.
He further said the if we merge an unhealthy bank with a large healthy one, it may bring problems for the large healthy bank at the time of consolidation.
"Having to fix the underlying problems at the same time as you dealing with all the cultural problems that come with the merger may be difficult," the RBI Governor said.
He warned that one needs to be careful in a reasonable way before thinking about merger of two banks.
Mr Rajan further said one of the reasons why public sector banks were facing large asset quality problem was lending to infrastructure sector which for variety of reasons, has not proved to be as profitable as people thought before.
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