Duvvuri Subbarao, former Governor of the Reserve Bank of India, on Wednesday said consolidation of banks is necessary to strengthen the banking system, and the government should be bold enough to “let certain banks die” in the process.

“Consolidation should be done keeping in mind the interest of minority shareholders and bring in greater autonomy for banks. You should let certain banks die. You should have the boldness to cut the flab, reduce staff and branches,” Subbarao said.

He was talking during an interaction after delivering a lecture at the second anniversary celebrations of Bandhan Bank here on Wednesday.

Reiterating that the primary objective of demonetisation was to attack black money, he said the success of demonetisation can only be measured by the increase in income tax collection as a percentage of GDP over the next three years.

“Income tax collection as a percentage of GDP is at 5.7 per cent at present. It should go up by 1 per cent this year and 0.5 per cent a year for the next two years. Unless that happens, we can’t see the cost benefits of demonetisation,” he said.

Autonomy for banks

Referring to the May 5th ordinance amending the Banking Regulation Act, Subbarao said the banking regulator should not step into the day-to-day activities of banks, as it does not have the expertise to manage a bank’s business.

The RBI had identified 12 accounts, representing about a quarter of the gross bad loans in the banking system, that would be eligible for immediate reference for bankruptcy proceedings.

The former central bank governor also said the RBI intervention was the “least bad decision” to check the rising NPAs in banks. Also, such extraordinary powers should come with a sunset clause.

“The government should have put a sunset clause so that it becomes clear that this is an extraordinary measure,” he said.

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