Inaugurating the two-day bankers' conference 'Bancon 2005' in Kolkata, Chidambaram said it is important to increase the capital base of the banks and urged the industry to gear up itself to raise Rs 60,000 crore capital in the next five years.
He said the issue would be discussed at the meeting of the bank CMDs convened on November 18. Banks, which do not have the scope to raise Tier I capital, would have to go for Tier II capital, he said, adding the additional capital could be raised by way of improved profitability, by better recovery or by raising from the market.
Stating that the contribution of the banking sector in the country's GDP was low at 35 per cent, the finance minister said the sector should set the goal for raising the contribution to GDP at 50 per cent and it would be only possible by raising the size of the banks.
Chidambaram said for banks to raise its share to 50 per cent, bank credit has to grow at a much faster pace.
He said size of the Indian banks was a limiting factor, adding that Return on Capital of the country's banking sector was high as compared to countries like Singapore, South Korea and China.
To increase lending activity of the banks, the finance minister said the banking sector should focus on the bottom of the pyramid by giving loans to tenant farmers, small and medium enterprise sector, and extending micro-credit in the villages.
He said the banking sector had neglected the poor and lending was skewed in favour of few industrial houses. For this reason, the government was forced to resort to 'directive lending' in favour of the farm and SME sectors of the Indian economy.
Chidambaram said for ensuring long-term profitability of the banks, the sector should raise share of non-fund income, improve quality of loans and employ better risk mitigation models.
He said the government was also in the process of putting in place a revised ombudsman scheme for dealing with customer complaints.
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