FM stresses consolidation in banking

Finance Minister P Chidambaram today said large public sector banks should look at acquiring smaller banks to kick off consolidation in the industry.

"Initiative must be taken by the bigger banks to take over smaller ones. This proposition is an attractive strategy, but the banks have to come up with proposals supported by their officers," Chidambaram said after a meeting with the chairmen and executive directors of the 28 PSU banks.

"Banks are in the process of sensitising their unions on the need for consolidation," he said, adding that Indian banking was highly fragmented and would sooner or later witness consolidation.

Referring to the need for banks to mobilise additional capital, Chidambaram said he had asked the RBI to quickly finalise the guidelines on hybrid instruments that the banks can raise as part of the proposed Tier III capital and also come out with norms on raising the remaining 50 per cent of the Tier II capital.

The RBI's guidelines on Tier I capital cover equity, reserves and the investment fluctuation reserve, and banks can raise sub-ordinate debt as part of Tier II capital up to 50 per cent of the Tier I capital.

On the question of greater managerial autonomy to PSU banks, Chidambaram said the bankers had not demanded any further managerial autonomy at the meeting. Unlike private sector banks, the public sector banks need to take government approval for various matters including setting up of subsidiaries abroad.

Setting at rest the debate on the interest rate front, Chidambaram said, "I still think there is ample liquidity in the system and the banks will be able to maintain the current interest rates in the current financial year, at least for advances for productive uses like purchase of plant and machinery, civil construction, import of productive assets etc."

On home loan interest rates, he said the Reserve Bank had indicated a slightly higher risk weightage and banks should be able to maintain the interest rates for 2005-06. The aggregate deposits of the banks had grown by 12.3 per cent in April-September 2005, while the aggregate credit had grown by 14.2 per cent.

While stating that the banks had in aggregate maintained the net Non Performing Assets (NPAs) at 1.81 per cent of the net advances, the finance minister cautioned the bankers that "the busy season is just beginning and we have to see that the NPAs are below 2 per cent for the whole year."

The heads of the PSU banks took up the issue of unfair playing field for banks under the Right to Information Act, which was forcing them to give out detailed information on matters that did not serve any purpose and information that could also be misused.

"The point of unfair level-playing field is well taken, but I have advised the banks to comply with the law," Chidambaram said.

Giving a thrust to the strategy to co-finance while targeting small and medium enterprises, he said the banks should enter into co-finance arrangements with state finance corporations on the lines of their arrangements with Sidbi, to provide both working capital and term loan to the sector, with the term loans being provided by the SFCs.