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RBI governor Urjit Patel has said that consolidation of public sector banks will help strengthen the Indian banking system. This would create fewer but healthier entities and help in dealing with the problem of stressed assets.

Rationale behind having so many public-sector banks:

  • The governor stated the need to have so many public-sector banks is not clear and the Indian banking system would be better off with fewer but healthier banks
  • To provide community level banking there were cooperative banks and micro finance institutions
  • Some banks can be merged as a quid pro quo for timely government technical injection

Measures to overcome the NPA and the stressed balance sheet issue:

  • RBI has completed a comprehensive asset quality review for banks
  • Public sector banks should raise private capital and should not be entirely dependent on capital infusion from the government
  • Sharing the burden of recapitalization will ensure that management decisions are market driven

Disinvestment in public sector banks and its impact:

  • It will have a positive role for the banking sector
  • Disinvestment will create a situation where the amount that government needs to inject will reduce and thus it will help deal with the problem of stressed assets and NPAs

Institutional reforms that were undertaken in recent times:

  • Roll out of GST, the biggest tax reform ever
  • Insolvency and bankruptcy code which will help reduce the problem of exit
  • Abolition of the Foreign investment promotion board

Comprehensive view of the demonetization process and its impacts:

  • Positive spillover effects include higher financial reintermediation, which is the movement of capital from non-banking investments into financial intermediaries
  • The share of low cost current and savings account deposits has increased
  • Faster transmission of monetary policy was another collateral benefit of demonetization

Cautioning against protectionism:

  • The governor remarked that giant internet corporations would have not reached their current levels without sourcing the best talent and products from the world over
  • The most efficient corporations the world over sustain their efficiency on global supply chains

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