Banks should explore inorganic growth: Bansal

The country's banking sector will have to explore inorganic growth options in order to face "significant" challenges emanating from large-sized foreign banks, minister of state for finance Pawan Kumar Bansal said today.

"Foreign banks with a large capital base, advanced technology, best audit and accounting practices and skilled personnel, are going to pose significant challenges to Indian banks. There is rich empirical cross-country evidence to indicate that inorganic growth is one of the best ways to compete with foreign banks," Bansal said at a banking seminar.

He also said that the government and the Reserve Bank (RBI) have plans to provide managerial autonomy and better operational flexibility to the banking sector by introducing a favourable regulatory climate.

The government would also encourage banks to find alternate revenue streams through fee-based activities besides creating new products and devising new distribution strategies, he said while releasing McKinsey report on 'Measurement of Global Competitiveness of Indian Banks'.

The country's banking sector has registered a 23.3% credit growth in 2006-07, while the credit-deposit ratio has improved to 74% in 2006-07 from 53.1% in 2000-01, exhibiting exponential growth, he said.

RBI has either received applications or is in talks with a host of foreign banks for licences to operate in India. The foreign banks are "attracted by the idea of servicing a fast growing economy and the promise of a liberalised scenario in 2009," Bansal said.

On the back of proper sequencing of economic and banking sector reforms, balance-sheet of Indian banks has increased significantly in the last 15 years, with all Scheduled Commercial Banks (SCBs) in the country having a comfortable Capital Adequacy Ratio of 12.3%, Bansal added.

Non-performing assets (NPAs) of SCBs have declined from 8.8% in 2002-03 to 2.7% in 2006-07. Besides, they have been delivering significantly in terms of stability and geographic penetration, he said.