Mumbai: The government will have to make up its mind either to bring in additional capital or move towards reducing its share from 51% in public sector banks through appropriate statutory changes, C. Rangarajan, who heads the Prime Minister’s Economic Advisory Panel, said at a banking conference.
Consolidation in the Indian banking sector was likely to gain prominence in the near future and this must be driven by commercial factors, he said.
“While there is some scope for expanding capital through various modalities, tier I capital, that is equity, is still critical. While this constraint may not be binding immediately, sooner or later it will be.”
Rangarajan noted state-owned banks accounted for 75% of Indian bank assets, and that consolidation in recent years had been confined to a few mergers in the private sector and some consolidation in the state-owned sector. “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.”
Consolidation driven by government or regulatory order was much less likely to be successful than mergers driven by commercial forces, particularly if the order was accompanied by restrictions on cost-cutting, he said.
“Any meaningful consolidation among public sector banks must be driven by commercial motivation by individual banks, with the government and the regulator playing at best a facilitating role,” he said.