Mumbai: Chairman of economic advisory council to the PM, C. Rangarajan on Saturday said credit risk remains a major risk in the banking system even as he encouraged Indian banks to go for consolidation.
“Credit has started rising and as the saying goes, bad loans are sown in good season,” Rangarajan said during his address to bankers at Bancon, the annual bankers’ conference.
He warned banks that exposure to real estate and infrastructure will increase the asset-liability mismatches for banks. Rangarajan also warned banks not to depend on the liquidity provided by mutual funds as he noted that 60% of the certificates of deposits (CDs) issued by banks are subscribed by mutual funds.
“The bulk of CDs has a maturity of three months or less. Funding provided by mutual funds can be volatile. This will be another area which will need to be watched,” Rangarajan said in his address.
According to Rangarajan, Indian banking sector is likely to see more consolidation in the future.
“As the bottom lines of domestic banks come under increasing pressure and the options for organic growth exhaust themselves, banks in India will need to explore ways for inorganic expansion,” Rangarajan said, adding that “this, in turn, is likely to unleash the forces of consolidation in Indian banking.”
However, he made it clear that any process of consolidation must come out of a “felt need for merger rather than as an imposition from outside.”
“… any meaningful consolidation among the public sector banks must be driven by commercial motivation by individual banks, with the government and the regulator playing at best a facilitating role,” Rangarajan added.
He acknowledged that capital flows have picked up in the last couple of months but insisted that it is still well within the comfort of the government.
“Capital inflows have picked up in October-November and large capital inflows will ensure that the current account deficit is funded. Our deficit at 3% of GDP is about $45 billion and I think inflows of up to $70 billion should not be a concern,” he said.