Asserting that insurance and pension reforms were underway, the government on Monday said there was "tremendous" need for consolidation to enable banks gain financial muscle and absorb risks in the years to come.
However, Economic Affairs secretary Ashok Jha made it clear that mergers and acquisitions of banks will not be driven by the government and the decision to merge would be left to individual banks.
Indian banks are really not that big
"If PSU banks wants to go for the marriage, government will bless them. But it (government) will not find the suitor," he said at the India Economic Summit organised by Confederation of Indian Industry and World Economic Forum in New Delhi.
Citing State Bank of India, he said it ranked 83rd among the global players and was still "very small" compared to them.
Hence, Jha said: "There is tremendous need for consolidation among both public and private sector banks. Apart from giving economies of scale, they (large banks) would be in a better position to absorb the risks."
Acknowledging the fact that banks would have to raise $11-12 billion in five years to comply with Basel-II norms and meet the increasing credit demand, he said, "bulk of the investment would come from the domestic sector although we would like to have most of the investment from overseas."
Though, there has been number of reforms in the banking sector, Jha admitted that the bank credit to GDP ratio in India was much lower when compared to other ASEAN nations.
"Sustained growth in GDP does mandate a significant increase in bank credit especially to small and medium enterprises and agriculture sectors, as they provide bulk of the employment," he said.
Jha said the government was committed to double credit to agriculture in three years while ensuring a 20 per cent growth in credit to SMEs.
Farm loans have grown by 32 per cent last fiscal, he said, adding it was up by 56 per cent in the first half of 2005-06.
In this context, he said the government will address the financial crisis, legal problems and regulatory aspects of cooperative banks on the lines of Vaidyanathan panel report, that proposed a Rs 15,000 crore (Rs 150 billion) bailout package.
On insurance, Jha said: "As far as hike in FDI is concerned, an announcement has been made already. The legislation is under consideration."
The government has to amend the IRDA Act to hike FDI limit in insurance from 26 to 49 per cent.
Pension reforms, he said, would ensure higher flow of household savings to infrastructure and added that the PFRDA Bill will be taken up for passage in Parliament shortly.
If the Bill is passed in the winter session, PFRDA will be able to put in place the rules for pension fund managers, central record keeping agency and other aspects by October 2006.
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