The government on Thursday said it will encourage mergers of public sector banks to create strong entities, which can compete with other world-class banks.
"We will be happy to see banks consolidating and growing in scale and muscle so that they can compete with world-class banks," Finance Minister P Chidambaram told reporters after his over 5-hour-long review meeting with bank chiefs in New Delhi.
He said the government will not forcibly merge PSU banks but favourably consider any such proposal.
The government will create a conducive environment for facilitating mergers, he said, adding a small amendment to the Income Tax Act would be carried out in February 2005 to help banks consolidate.
Chidambaram also encouraged PSU banks to tap the market and raise more capital. Banks like Punjab National Bank, Bank of India, Indian Bank, Dena Bank, Syndicate Bank and Allahabad Bank were already considering public offers in the coming months to raise fresh capital and improve their capital adequacy ratio.
Asked if the Reserve Bank of India report was dampening the flow of foreign direct investment in banking sector, Chidambaram said it was only a discussion paper and the central bank has promised to come up with a second such paper.
RBI papers are meant to invite a debate on the issue, he said, adding: "Final decision on ownership pattern will be taken by the government."
Satisfied with the performance of banks for higher credit to agriculture, infrastructure and education, he said: "I intend to review progress again in the third week of January that will give me inputs for the next budget in February 2005."