Former Reserve Bank of India (RBI) Governor C. Rangarajan on Tuesday said that to complete the clean-up process of non-performing assets (NPAs) it has become inevitable for banks to take some haircut.
"The clean-up has to be done and perhaps some haircut is inevitable. The whole question is whether the banks are ready for haircut and how is it managed. The best solution is that with the haircut the debt should be getting resolved," Rangarajan told reporters here on the sidelines of the 36th Foundation Day of National Bank For Agriculture and Rural Development (Nabard).
He said that one-time adjustment has been done even in the past but in this case the quantum of debt gone bad is huge and it will take at least a year to resolve the festering issue.
"Some adjustment is needed. We have always done one-time adjustment in the past. But now, the quantum of loans is big, but the step is required. Without finding a solution to the NPAs we will not be able to move forward to stimulate the economy," he said.
"It will take at least a year to resolve the NPAs," he added.
On bank consolidation, the former RBI Governor said that mergers were a part of evolution of the sector but should not be imposed against the banks' will.
"The point really is that the financial system has to move forward. Mergers and acquisition are common feature in the business. Mergers are a part of the evolution of the business sector. So, if some banks want to come together and become a bigger one, it should be allowed. The initiative should come from the banks and not be imposed," he said.
"What is needed is for the banks to feel the need and come together and only in those circumstances the mergers will really work. I would really think that ...a need for it should be felt," he added.
"The world over, larger banks are coming into operation. The system will have some large banks, some small and also local banks. "What is needed is variety, but this movement (merger) will happen," Rangarajan said.
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