The government should infuse more capital into state-run banks or move to cut its stakes below 51 per cent to meet the growing needs of the economy, a top economic adviser to the government said on Wednesday.
Consolidation in the Indian banking sector was likely to gain prominence in the near future and this must be driven by commercial factors, C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, told a banking conference here.
“The government will have to make up its mind either to bring in additional capital or move towards reducing its share from 51 per cent through appropriate statutory changes,” he said.
“While there is some scope for expanding capital through various modalities, Tier 1 capital, that is equity, is still critical. While this constraint may not be binding immediately, sooner or later it will be,” he said.
“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.