Manmohan urges banks to consolidate to spur growth

India's plethora of banks need to consolidate to compete on the world stage and must contribute to economic growth by lending more widely and efficiently, Prime Minister Manmohan Singh said on Saturday. India wants to expand its $600 billion-plus economy at more than 8 percent to help lift some 260 million people out of grinding poverty and Singh said extending credit to smaller enterprises and farmers was key to accelerating growth.
But the banking system, with hundreds of public, private and rural banks and tens of thousands of branches, needed to start by shaping up.
"To be effective, relevant and useful...the banking system must respond to the changes in the real sector," Singh said at an event marking 200 years of India's largest commercial bank, the State Bank of India.
"While there is no single model for consolidation, the system must consolidate itself."
Analysts say Asia's fourth largest economy is both overbanked, with too many banks, and underbanked, with inadequate provision of services to vast numbers of the population, and the Congress-led government is pushing for gradual reforms.
It is encouraging 27 state-run banks, which handle 70 percent of business, to merge to become more competitive.
Singh, who opened India's highly controlled economy to the world as finance minister in 1991, said while banks had ridden out the first phase of change, the challenge was to cope with rising commercial pressures as the economy opens further.
State-run banks have been given greater autonomy to set up overseas units and buy domestic and foreign banks without government approval, with the central bank setting 2009 as a target for more reforms.
India's economic development is often compared, sometimes unfavourably, with neighbouring China but Singh said banking was one area where India held its own.
"If there is one aspect in which we can confidently assert that India is ahead of China, that is in the robustness and soundness of our banking system," he said.
Indian banks' bad loans have fallen sharply in the past few years. Net non-performing assets are expected to fall to 2 percent of net loans by March 2006.