Bank mergers to get tax sops

Move aimed at consolidating the Indian banking sector.

Finance Minister P Chidambaram said the government was planning to extend tax sops in the next Budget to help consolidation in the Indian banking sector.

After a meeting with the heads of public sector banks and financial institutions, the finance minister told reporters the Reserve Bank of India's discussion paper suggesting the holding pattern in banks was meant to encourage debate. "A final decision on ownership pattern will be taken later," he added.

A large number of foreign banks, which were earlier planning to set up subsidiaries in India, have deferred a decision in the absence of clarity on lifting the 10 per cent cap on voting rights.

In addition, group and individual holdings in private banks were proposed was to be gradually reduced to 10 per cent. The RBI had proposed to allow only 5 per cent holding by foreign banks in an Indian subsidiary. This was despite the government's decision to raise the foreign investment ceiling to 74 per cent.

Chidambaram also said he expected interest rates to remain stable in the medium term. "There is excess liquidity in the market today. Banks are being encouraged to lend more. As the RBI governor has said, in the medium-term interest rates will remain stable. That is my sense of the situation," he said.

The finance ministry wants banks to reduce their investment in government securities and instead offer new investment avenues to retail investors besides enhancing credit flow to agriculture and infrastructure projects.

The finance minister said the government would stay away from arranging mergers and would instead let banks decide their partners. He was also in favour of banks tapping the markets for raising funds.

"We will not force consolidation. We will be happy to see banks consolidating and growing in scale and muscle so that they can compete with world-class banks," Chidambaram.

He, however, appeared satisfied with the performance of banks in ensuring higher credit flow to agriculture, infrastructure and education. Another review is proposed in January.

On the issue of amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002, Chidambaram said the changes would be incorporated after more consultations on the matter.