"The consolidation has to be addressed not merely to create behemoths but to benefit from the synergy created by mergers," he told bankers at 'Bancon' in New Delhi.
"Their (consolidation) footprints should cover the most interior rural areas and provide support to far-flung sectors, which at present face enormous difficulty as small banks find such remote branches unviable," Chidambaram said.
While consolidating, he said, special care would have to be taken to "satisfactorily" address the human resource issue in the overall context of technology introduction and branch rationalisation.
Emphasising that regional and ethnic consideration should be built into any proposal for consolidation, he said such a process should maximise synergies in terms of regional balance, network of branches, human resource cultures, asset commonality and ensure that legacy issuers are not overruled.
He, however, favoured consolidation, saying, with globalisation, Indian public sector banks would have to compete with foreign banks and entities.
International trends suggest that consolidation has reduced the chances of credit risks, he said.
"There is a near consensus on the issue, to attain global aspiration and provide better banking services to rural and hitherto unbanked areas, banks have to consolidate," he said.
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