Banking industry for consolidation
Encourage voluntary consolidation among banks, allow public sector banks to fix salary levels proportionate to performance and permit banks to issue preference shares to raise capital.
These were some of the views expressed by majority of the participants in a survey conducted by the Federation of Indian Chambers of Commerce and Industry among banks.
The Indian financial sector is ready for consolidation, said 95 per cent of the respondents. Given the increased competition, and the implementation of Basel II norms in the near future, the banking industry of the country would be better off with six to seven banks as big as State Bank of India, said the survey. However, voluntary mergers are better than forced ones.
A majority of the public sector banks also demanded more autonomy to fix salary levels proportionate to performance. In order to improve employee productivity it is essential to offer competitive compensation packages at all levels, the survey said.
About 92 per cent of the public sector banks respondents voiced that they do not have sufficient autonomy to offer attractive incentive packages to employees to ensure commitment levels.
The instruments in the market are sufficient to meet increased capital requirements of banks under Basel II norms, said 83 per cent of the respondents.
The instruments in the market are sufficient to meet increased capital requirements of banks under Basel II norms, said 83 per cent of the respondents. Some banks also said that in one-year’s time, banks should be permitted to issue preference shares.
According to the survey, some of the strengths of the banking industry are regulatory systems, economic growth, technological advancement, risk assessment systems and credit quality.
Areas that need improvement include diversification of markets beyond big cities, human resources systems, size of banks, high transaction costs, infrastructure and labour inflexibilities.
As per the survey some strategies that can help India achieve a world class banking system are consolidation, strict corporate governance norms, regional expansion within the country and outside, higher FDI limits and Free Trade Agreements with countries where India has comparative advantage in banking sector.
"Availability and reach of quality products is confined to just big cities. Thus it is essential now to expand the gamut of banking services both within India as well as outside," the survey said.
Of the foreign banks’ that participated in the survey, 75 per cent were happy with their working experience. "Given India’s potential over the next decade and beyond, all the foreign banks have formulated strategies for future expansion in India," said the survey