Consolidation of banking sector likely to gain prominence-Rangarajan

Mumbai, Sep 12 (UNI) Consolidation of banking sector is likely to gain prominence in near future in the country and this process should arise out of a felt need rather than imposing from outside, said Prime Minister's Economic Advisory Council Chairman Dr C Rangarajan.

Addressing the Global Banking Conference, organised by the Federation of Indian Chambers of Commerce and Industry (FICCI), here today, Dr Rangarajan also pointed out to the inorganic path as the preferred way for banks to explore business growth.

''This, in turn, is likely to unleash the forces of consolidation in Indian banking. Despite the liberalization process, state-owned banks dominate the industry, accounting for three-quarter of banks,'' he said.

Dr Rangarajan's remarks have come at a time when public lender State Bank of India (SBI), country's largest bank, is considering the consolidation of some of its associates like State Bank of Sourashtra and State Bank of Travancore.

Similar views had also come from regulator Reserve Bank of India (RBI), which came up with certain directives to encourage the consolidation of small and medium-sized banks with larger banks in the country.

Despite the liberalization process, state-owned banks continue to dominate in the banking industry, accounting for three-quarter of banking assets. While the consolidation process in recent years has primarily been confined to a few mergers in the private sector, although some recent consolidation in the public sector is also evident, Dr Rangarajan said.

''Consolidation driven by fiat is much less likely to be successful particularly if the decision is accompanied by restrictions on normal avenues for reducing costs in the merged entity. Thus, any meaningful consolidation among the public sector banks must be driven by commercial motivation by individual banks, with the Government and the regulator playing a best facilitating role,'' he added.

He also said that the Government is keen with its efforts to iron out the legal impediments inherent in the consolidation process.

While consolidation does not mean that small or medium sized banks will have no future, actual experience in similar industries has shown that such banks have been able to survive and remain profitable along with large financial conglomerates, he added.

Later while speaking to reporters on the sidelines of the seminar, he said that India is likely to maintain the GDP growth of 9 per cent near term while the inflation rate, which is currently below 4 per cent, is also comfortable.

UNI