Addressing the annual general meeting of the Indian Banks' Association, Finance Minister P Chidambaram on Friday said, "We expect one or two cases of consolidation this year, which would be driven by the need to acquire size and muscle and not driven by regulatory considerations."
He said weak banks have no option but to merge with banks, which have excess capital. The finance minister did not specify how he defines a weak bank, but bankers said Chidambaram must have had in mind inability to grow as the criterion for describing a weak bank.
Consolidation is being driven by the need for revenue growth, savings in cost and to improve efficiency, he said. He pointed out that Indian banks would need Rs 42,000 crore (Rs 420 billion) of capital by 2010 to meet the stringent Basel II norms.
Basel II is the revised capital adequacy framework that requires capital allocation for operational risk, in addition to credit and market risks and also allows stronger banks to make more efficient capital allocation.
The government has also appointed a committee headed by former Reserve Bank of India Governor C Rangarajan for ensuring greater financial inclusion.
Chidambaram expects banks to give priority to financial inclusion and said banks need to find business opportunities at the bottom of the pyramid as the poor are bankable and creditworthy.
Chidambaram also said the government was planning to bring a comprehensive legislation on micro-finance. Earlier, addressing large tax paying units, the finance minister said companies need to improve tax compliance and pointed out that it has not become part of corporate governance.
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