As many as 93 per cent of those who responded to a Federation of Indian Chambers of Commerce and Industry survey on the status of the Indian banking industry stated that it was high time Indian banks consolidated and both public and private sector banks are in equal need of consolidation.
This is because the size of Indian banks holds the key to their becoming globally competitive.
The survey, which is based on the feedback from 75 respondents from leading banks, financial institutions, intermediaries and market players, further revealed that 90 per cent of respondents are in favour of raising the limit of 20 per cent on foreign holding in public sector banks and allowing foreign direct investment in them.
A further 80 per cent are for excluding ADRs and GDRs from this limit.
However, there is a sharp difference in the perception of public sector banks and private sector banks on how critical FDI and FII are.
Perhaps predictably, none of the public sector bank respondents consider such investment to be critical, whereas 75 per cent of respondents from private sector banks hold the opposite view.
A more liberal approach to investment in banking is perhaps natural as 84 per cent have claimed that Indian banks require fresh infusion of capital to enhance their competitiveness.
But 77 per cent believe that the Indian stock markets can meet the requirements of the Indian banking sector in spite of the low price earning ratio (2 per cent) of the shares of Indian banks.
The regulation of Indian banks, followed by their profitability and solvency as measured by capital adequacy, score the highest when compared to banks worldwide, according to the survey respondents.
However, banks' internal control systems fall short of international norms. Despite recent improvements, non-performing assets remain an important issue. A long-term inadequacy of Indian banks is their inability to meet long term credit requirements of the economy because of asset liability mismatches.
The inability to borrow long has hampered their ability to fund infrastructure projects. The irony is the development financial institutions, who are meant to supply long term funding, have also not delivered in this area.
Banks being recently allowed to issue long term bonds will certainly help but it is necessary to offer fiscal incentives to the takers of long term bonds so as to help the growth of this end of the bond market.
Asset liability mismatch highlights the need for better risk management, which is a cornerstone of the Basel 2 norms that have to be in place by 2006.
Over half (55 per cent) of respondents claim to be unprepared for shifting to the new norms in time and 44 per cent will require two more years (beyond 2006) to come up to the mark.
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