FM justifies revision of FDI limit in banks

Chidambaram hints at major changes in the banking sector.

Finance Minister P Chidambaram today said that major changes in the banking sector would be made in order to bring the industry to global levels.

He also justified the revision of the foreign direct investment (FDI) limit in banks on the grounds that it would create an enabling environment for higher FDI inflows in the country.

Chidambaram was replying to Communist Party of India's leader Gurudas Dasgupta's charge that the government was opening a back door for privatisation of public sector banks.

Dasgupta had called the finance minister's attention in the Lok Sabha to changes in the banking policy.

"The revision in FDI limit will create an enabling environment for higher FDI inflows along with infusion of new technology and management practices resulting in enhanced competitiveness," Chidambaram said in a statement amidst pandemonium in the Lok Sabha over yesterday's train accident.

He said the Reserve Bank of India (RBI) was considering suggestions on the draft guidelines for regulating FDI flow which was placed in the public domain in July. The government had in a notification of March 5, 2004 enhanced FDI limit in private sector banks from 49 to 74 per cent.

Stating that public sector banks account for around 26 per cent of the total banking business in the country, he said, "In order to bring the banking industry to global levels, new initiatives are being contemplated to bring changes in the banking sector."

Consolidation in the banking sector is part of these initiatives. The public sector banks are seriously evaluating consolidation as one of the strategies to increase competitiveness and add value, he said.

"Consolidation is a timely response to augment efficiency which would lead to income generation and add to the gross domestic product (GDP) of the country," said Chidambaram.

Legislative changes have been carried out primarily to tackle the problem of non-performing assets and quality of credit appraisal by banks, he said.

Besides the amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the government would also be bringing in a legislation for regulation of credit information companies.