India needs larger banks, consolidation: Parekh

New Delhi: Welcoming RBI’s guidelines for grant of new bank licences, eminent banker Deepak Parekh has said consolidation is a greater need for the Indian banking space to create some large banks of global size and scale.

“I think that the RBI (Reserve Bank of India) guidelines for grant of new licences are well thought-through and it seems that a lot of thinking has gone into it,” said Parekh.[caption id=“attachment_637503” align=“alignleft” width=“380”] HDFC chairman Deepak Parekh. Reuters[/caption]

However, a greater need of the hour in the Indian banking space is banks of large size and scale to match their international peers and consolidate their positions on the global league tables, Parekh said in a telephonic interview.

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A veteran banker and well-respected industry leader, Parekh is chairman of financial services giant HDFC Ltd whose group companies include leading private sector lender HDFC Bank.

When asked whether he feels that Indian banking sector needs more players, Parekh, however, said a greater need of the hour is banks with much larger size and scale.

“I have always said that we need consolidation, rather than more players in the Indian banking sector.

“The need today is for more consolidation than the new banks, because what we require is large-scale banks,” he said. Asked if Indian banks need to match the size and scale of their international peers and consolidate their positions on global league tables, Parekh replied in affirmative and said: “We need scale for that and we would need consolidation to get the scale.”

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Parekh also said the Indian banking sector needs to address the issue of huge unbanked population in rural areas.

“We need to have much more rural branches today, although it will be very difficult for new banks to have 25 percent rural branches. It is a very tough call.

“Still the guidelines are very well thought-through for a comprehensive, pretty fair and transparent process to grant new licenses,” he said.

Parekh further said RBI in its final guidelines for new banking licences has taken care of all critical issues such as capital adequacy, foreign holding and rural branches.

“They have not excluded anyone outrightly and now it is their (RBI’s) prerogative that how many licences they want to give,” Parekh said.

Earlier, there were apprehensions that RBI might not allow companies with exposure to certain high-risk sectors like brokerage and real estate to seek banking licenses, while there were also voices of opposition against large business houses being allowed to set up banks.

However, the final guideline does not exclude any aspirants on the basis of their business interests and rather focusses on ‘fit and proper’ criteria for grant of licences.

RBI has said the applicants should have a past record of sound credentials, integrity and financial strength with a successful track record of 10 years.

RBI has fixed a minimum equity capital level of Rs 500 crore for the banking license aspirants, while capping the foreign holding in the first five years to 49 percent and mandating 25 percent of branches in rural area.

The RBI’s decision to open up the sector for new players has been widely welcomed by the aspirants as well as independent experts and industry leaders.

“The new RBI Guidelines on the banking licenses have opened the doors to next-generation banks. The move not to bar any sector and tough Group exposure norms are steps in the right direction,” said S Ravi, an eminent chartered accountant and independent director on various public companies.

“This will envisage the existing banks towards better performance which augurs well for the customers. RBI’s emphasis on the track record of the promoters will go a long way in establishing a stable and safe banking companies,” he said.

At the end of last fiscal, India had a total of 173 commercial banks, which included 169 scheduled commercial banks and four non-scheduled commercial banks.

Excluding the regional rural banks, there were 87 scheduled commercial banks in the country as on 31 March 2012. This included including about 27 from the public sector and 20 the domestic private sector banks.

As on 31 March 2012, a total of 41 foreign banks operating in India, while another 46 overseas banks had their respective representative offices in the country. In comparison, on lay 23 Indian banks had any overseas presence at the end of last fiscal.

Also, none of the Indian banks figure among even the top-50 banks globally in terms of either valuation or size, measured by equity and reserves.

PTI