Big banks yes, but forced merger no: Rangarajan

The following are the comments that Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, made during the Q&A session that followed his speech at Bancon 2011.

On M&As…

Mergers&Acquisitions are a part of the natural process of the economy. But there is no point in forcing a merger.

Unlike in the developed countries with the presence of ‘banks too big to fail’, the scenario is different here. But mergers may happen if there is a need for the same with assured synergy for the banks involved.

There is indeed a case for ‘large banks’ here that can meet the emerging need for rising credit in various sectors of our growing economy. Along with this, the regulatory regime also needs to change putting in place additional conditionalities because in big banks, there can be a systemic impact.

On fake notes...

Currency notes of larger denomination may have been proving vulnerable in regard to the frequent resort to which they have lent themselves to being forged. It would be a good idea to introduce or enlarge elements on the currency note that render it difficult for miscreants to mess up with the note.

On power sector reforms...

There is a felt need for reforms in the power sector. There is no lack of demand for power. There is no problem with the sector, the only concern is on the distribution sector front.

State Electricity Boards are incurring huge losses by selling power below cost. The issue was taken up during the meeting of the National Development Council. A committee has been set up to review the situation.

The situation can be redeemed to some extent if only State Governments are willing to make good the losses of the power utiities or allow them to charge more for the units sold. State Electricity Regulatory Commissions have a major role to play in this regard.

On innovation…

The banking system needs to evolve new methodologies and procedures in managing the delivery of credit to different sectors. In good old days, a bulk of the credit used to go to the manufacturing sector. Not any more. The services sector does not operate along those lines.

We need to evolve new methodologies of financing start-ups and evaluating institutions in this sector since the needs are different and ecosystem is just about evolving.

Scenario of continuous inflation...

This is an area that calls for a separate lecture altogether. Ours is a unique situation when compared to emerging economies, not to speak of the developed economies. Growth has moderated with inflation sustaining at what are unsustainable levels.

The level of inflation is far higher than many other countries and comparable economies and needs to be addressed fare and square. It started off with higher prices in the foodgrains followed by a flare-up in vegetable prices.

Now it has become generalised, with manufacturing inflation peaking to 7.4 per cent, setting off demand pressures in the economy. The Reserve Bank has been exhausting its ammo in terms of successive and sustained tweaking of policy rates, justifying its action on the basis of signals that inflation is not anymore confined to food, and with the aim at curtailing demand pressures in the economy.

It is probable that the policy action would be reviewed with an expected decline in inflation in December/January.

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