The Hindu : National : `New initiatives planned in banking sector'

Online edition of India's National Newspaper
Thursday, Dec 16, 2004

National

National

`New initiatives planned in banking sector'

By Our Special Correspondent

NEW DELHI, DEC. 15. In order to bring the banking industry to global levels, the Government is contemplating new initiatives to bring substantive changes in the banking sector. As part of this new initiative, the Finance Minister P. Chidambaram today told the Lok Sabha that public sector banks were seriously evaluating consolidation as one of the strategies to increase competitiveness and add value.

In a statement in response to a calling attention notice by Gurudas Dasgupta (CPI), he also pointed out that revision in the foreign direct investment limit from 49 to 74 per cent in private sector banks would create an enabling environment for higher FDI inflows. It would also result in infusion of new technology and management practices resulting in enhanced competitiveness, he said.

Mr. Chidambaram that said in order to regulate the flow of FDI and set out the roadmap for this purpose, the Reserve Bank is considering the suggestions and feedback to draft guidelines and the discussion paper that had been placed in the public domain. "Thus it may be seen that all the changes in the banking policy are being contemplated to strengthen the banking sector in India for the benefit of customers and preserve their trust in the banking industry," he said.

He pointed out that consolidation in the banking sector was suggested by the Narsimhan Committee in its report in 1991 as part of wider financial sector reforms. To consider this idea further, the Indian Banks Association appointed a working group to examine legal, regulatory and other related issues for consolidation in the banking industry. He said the working group had sent its suggestions to the Government in October this year.

Mr. Dasgupta had raised the issue of the situation arising out of the move of the Government to change the banking policy, dilute the government stake in public sector banks, merge the public sector banks to form giant banks and enhance FDI limit in private to the detriment of interests of the common people.

He also pointed out that the policies being implemented were nothing short of gradual privatisation.

He recalled that bank nationalisation had been carried out to support the social and productive sectors of the economy and in the interests of the people.

He regretted that the Congress was not looking for an alternative policy but following the same one as that of the BJP. He also warned that raising the FDI limit in the private banking sector would enable foreign companies to take over these banks. And foreign banks are well known, he noted, for not following the dictates of the RBI.

He was also critical of the new merger policy, maintaining that it could lead to a monopolistic situation in the banking sector.

Mr. Chidambaram, however, felt that consolidation would allow economies of scale in terms of footprint, manpower and other resources. Having Indian banks of a larger size would also enable them to face competition arising from internationalisation of the economy. Large size also entailed better management of risk, he said adding that small and weak banks posed systemic risks with their low capital adequacy ratio and high non-performing assets. He felt that consolidation was a timely response to augment efficiency, which would lead to income generation and add to GDP of the country.

At the same time, he felt the initiatives for consolidation had to come from the management of the banks themselves with the Government playing a supportive role as the common shareholder. "No directive on consolidation has been issued by Government and RBI," he said.

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