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Consolidation in banking sector must: Reddy

The Reserve Bank of India (RBI) governor, Y.V. Reddy, has said consolidation in the banking sector is an important "work in progress."

"An important issue, specifically relating to the banking sector, is consolidation. Despite the liberalisation process, the structure of the Indian banking system has continued without much change though development finance institutions were merged with banks," Reddy said.

Consolidation was one of the ten issues which the RBI governor described as "work in progress" in his address to central bankers and policymakers at the International Centre for Monetary and Banking Studies in Geneva.

Some mergers may take place in future for compliance with minimum net worth requirement or norms on diversified ownership. RBI has stipulated a minimum networth of Rs. 300 crore for all private sector banks and has restricted the equity stake of a single entity in a private sector bank to a maximum of 10%.

The RBI has created an enabling environment for mergers and acquisitions and banks would explore ways for inorganic expansion as their bottom lines come under increasing pressure and the options for organic growth exhaust, Reddy said.

Dwelling on the role of foreign banks, the RBI governor said foreign ownership in domestic banks is quite significant. Private banks where foreign ownership is well over 50%, account for around half of the total assets of domestic private banks. Private sector banks account for about 18% of the banking sector's total assets. Even in several public sector banks, the extent of foreign ownership within the private holding is close to that of the domestic private holding.

The other issues referred to by Reddy included fuller capital account convertibility, measures for greater financial inclusion and implementation of revised capital adequacy norms, popularly known as Basel II norms, which require banks to allocate capital for operational risk in addition to credit and market risks.



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