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Description
Indian banking sector needs consolidation because of a number of reasons. With globalization, the competition faced by the public sector banks in India is very high. At this juncture, consolidation alone can help the smaller and weaker banks to perform well. The present government is also promoting the consolidation initiatives in the banking industry by offering a number of sops. This article discusses the different issues associated with the consolidation wave in the Indian banking industry.
Lately, enormous importance is being given to consolidation in the banking industry. The Finance Minister also acknowledged this fact by committing to encourage mergers particularly among the Public Sector Banks (PSBs), on August 28, 2004 at the general meeting of the Indian Banks' Association (IBA). To start off, the finance minister promised to provide tax incentives in the imminent budget for the PSBs that would evince an interest in merging. The minister is keen about placing at least three or four Indian banks among the top 100 banks in the world. However, the government intends not to force any merger but only encourage voluntary mergers indirectly. The government has the framework to initiate consolidation of the Indian banking industry.
It is high time that the Indian banking system went in for consolidation because the Basel II norms are compelling banks to enhance their capital base to cautiously tackle the market, credit and operational risks. In tune with the Basel norms, the IBA is proposing to raise the minimum net worth to be maintained by the banks to Rs. 300 cr. This is expected to pilot voluntary mergers and acquisitions among Indian banks, as relatively weaker banks would come forward to merge with the stronger ones, in order to satisfy the capital requirement as proposed by the Basel II norms. There is also a proposal to bring down the shareholding by a single entity in the Indian banks to 10%. This also may promote consolidation in the banking industry since the shareholding can be significantly brought down through mergers and acquisitions as they encourage diversified ownership.
Keywords
Indian banking sector,,globalization, ,competition faced, , public sector banks, very high, juncture, consolidation alone , smaller and weaker banks,government,promoting the consolidation, banking industry,Indian banking industry.
