MUMBAI, Aug 27: India’s Finance Minister Palaniappan Chidambaram said on Saturday state-run banks needed to consolidate amongst themselves and with private-sector banks to survive increasing competition.
The government has decided that the move for consolidation has to originate from the banks themselves — driven by the boards and supported by the officers and employees and based upon operational synergy and strategic coherence, Chidambaram said.
India’s crowded banking sector has nearly 100 public, private and foreign banks, besides some 200 regional rural banks.
There are around 30 privately-managed banks, while the government owns a majority stake in 19 of the public sector ones, including the largest, State Bank of India (SBI) , and its seven associate banks.
The Reserve Bank of India (RBI) owns almost 60 per cent of SBI, which handles a fifth of all bank deposits and loans. Together the SBI group and public sector banks account for nearly 75 per cent of all loans and deposits.
Speaking at the annual general meeting of the Indian Banks’ Association, Chidambaram said the new Basel-II norms could see many state-run banks accessing the capital markets, but since the government’s stake could not fall below 51 per cent, banks would have to design innovative instruments.
India has agreed to implement norms for Basel-II by the end of 2007. These are a set of bank safety rules that an international group of regulators published last year.
Chidambaram’s comments come just days after the government, under pressure from its communist allies, dropped an amendment in a banking reform bill which sought to reduce the government stake in state-run banks to 33pc from 51pc.
The previous government, voted out of power last year, had planned to amend laws to lower this floor to 33 per cent. But the current Congress government is propped up by communists who are opposed to any such move saying it will lead to massive job losses.
Banks are the second-largest employer in the formal economy after Indian Railways, with over 800,000 people on the payrolls.
Chidambaram told the meeting some large state-run banks needed to be more aggressive with their lending and deposit targets to reflect robust activity in Asia’s third-largest economy.
He said some government-run banks had given him statements of intent for 2005/06 which had projected a drop in deposit growth and lending activity.
If the rate of growth of the economy in 2005/06 is maintained at 7 per cent, it is difficult to understand how business projections by public sector banks, especially deposits and advances, can evidence deceleration in growth, he said.
Bankers attending the meeting, and shaken by Chidambaram’s words, said they would go back to their boards to redraw business plans for the financial year to March 2006.
All Indian Banks’ Association members will review their business targets. SBI will also go back to its board, A.K. Purwar, chief of IBA and SBI, told reporters after the meeting.
State-run banks have been cautious in projecting aggressive business targets as they will need more capital to fund them. Analysts say since headroom to raise capital is restricted by the government’s rule of retaining a 51 per cent stake, many banks have decided to go slow in pushing through expansion plans.
