The Hindu Business Line : `Banking industry cannot escape consolidation'

BANKERS' MEETING: (From left) Mr A.K. Purwar, Chairman, SBI and IBA; Mr P. Chidambaram, Finance Minister; Mr V.P. Shetty, CMD, IDBI and Deputy Chairman, IBA at the AGM of IBA in Mumbai on Friday. - Shashi Ashiwal

Mumbai , May 26

The Indian banking industry should hopefully see one or two cases of "true consolidation" before the end of the year, the Union Finance Minister, Mr P. Chidambaram, said. "Weaker banks may have no option but to merge with banks having better capital. The Government maintains that the initiative should come from the banks themselves," the minister said.

He was speaking at the Annual General Meeting of the Indian Banks' Association, in Mumbai, on Friday.

Consolidation can help save costs and effect optimal deployment of capital. Banks will also have to explore different avenues for raising capital to meet norms under Basel-II. These norms come into force in India from March 31, 2007 onwards. The estimated capital infusion for banks is Rs 42,000 crore by March 2010. Banks would require low-cost capital under Tier-I and Tier-II. "The task is cut out for banks and they will have to speed up their efforts of raising capital," Mr Chidambaram said.

In his address, the Minister urged banks to take financial inclusion as a challenge for the current year. Banks need to recognise that the poor are bankable and credit-worthy and need to invest in designing innovative delivery mechanisms for offering credit to the segment of the population that is currently out of the purview of institutional credit.

Search bottom of pyramid

"Banks need to find opportunity at the bottom of the pyramid to expand the volume of business. Profitability can be increased only by finding newer avenues for deployment of funds," Mr Chidambaram said.

Banks also need to allocate resources across all sectors. "The ratio of bank credit to GDP in India is less than 50 per cent. But in developing countries it is over 70 per cent," he said.

In response to a question on how oil prices will affect inflation Mr Chidambaram said that one price hike would not make a difference to inflation, which is dependent on several factors. "Our experience is that when monsoon sets in, it will have a price-restraining effect," he said.

More Stories on : Events | Public Sector Banks | Mergers & Acquisitions

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