Veteran banker and New Development Bank (NDB) President KV Kamath described the merger of State Bank of India's associate banks with the parent as a "good first step", but said there is scope for further consolidation as large banks are needed to cater to the growing economy.
Kamath also underlined the need for a bad bank to deal with rising non-performing assets (NPAs) of the banking sector with a rider that it should be created only after putting in place a proper funding mechanism.
"If you look at the size of our economy, we need a few more large banks. So clearly there is space for consolidation in the public sector and possibly in the private sector also because you need much larger banks to cater to this economy," said Kamath, the first head of the Shanghai-based multilateral lending institution headed by the BRICS (Brazil, Russia, India, China, South Africa) economies.
Also Read: SBI's Associate Banks: From A Princely Past To A Blue Chip Future
Kamath said in India either banks need to grow organically to that scale or go in for consolidation process.
With the regard to the merger of five associate banks – State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Patiala and State Bank of Hyderabad – with SBI, he said, "On a broad basis, consolidation had to happen, so it is a good first step".
However, he added that in the consolidation process one has to be careful that the merged entity remains healthy and is able to meet the challenges.
"It cannot be an arithmetic addition of few banks together or two banks together," he told PTI in an interview.
On the idea of a bad bank, Kamath opined, "I look at it in a simple way. If a bad bank can be funded with enough capacity to take these (bad) loans off the books of the existing banks, it's a great solution. But first we will have to get the funding in place. Then we have to look at the timelines to get these things organised because we do not have much time".
On whether the NDB would be willing to fund a bad bank, he said, "No. Our focus is on infrastructure funding".
Also Read: New Development Bank To Raise Funds Through Masala Bonds, Says KV Kamath
The idea of a bad bank was floated in the Economic Survey, which suggested creation of the 'Public Asset Rehabilitation Agency' (PARA) to help tide over the enormous problem of stressed assets, which have touched double digit.
The gross NPAs of public sector banks have risen from Rs 5.02 lakh crore at the end of March 2016 to Rs 6.06 lakh crore in December 2016.
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