RBI's Gandhi wants banks to consolidate

He said there are at present times several congruent factors that indicate that consolidation in Indian banking scene has its right time

Reserve Bank of India (RBI) Deputy Governor R Gandhi recently said the time was ripe for Indian banks to consolidate, according to the transcript of a speech copy posted on the central bank's website on Tuesday.

"There are at present times several congruent factors that indicate that consolidation in Indian banking scene has its right time," Gandhi said at a media event in Bangalore on April 22.

Although India is the seventh largest economy in the world in terms of nominal gross domestic product (GDP), there is no Indian bank in the list of 70 large banks in terms of asset size, he said.

"The efficiency gains resulting from lower cost of services and higher quality of services is too attractive to ignore," he added.

Besides, larger banks could be less risky than a smaller bank owing to the more diversified portfolio and less volatility in the earnings of large banks. This earns the large banks a better credit rating.

In India, there is lot of scope for banks to grow in size to become efficient and diversify their risks. Large banks can finance large projects and help to meet the demands of Indian businesses that are growing, he said. There are 48 domestic banks, excluding regional rural banks and local area banks, of which there are 27 public sector banks with a market share of around 70 per cent in terms of asset size. While RBI is typically neutral on its stance on bank consolidation, Gandhi's take assumes significance as that would indicate that the central bank also wanted banks to consolidate even as it introduced new, specialised banks in the system.