The past decade has been a sellers’ market as far as the Indian banking sector is concerned,” K.C. Chakrabarty recently said in a speech. The outspoken Deputy Governor of the Reserve Bank of India bluntly said this would change and banks would have to differentiate their offerings if they wanted to stay in business. “The mantra would be to innovate or perish.” Intense competition could drive “a spate of mergers and lead to consequent consolidation within the sector. The entry of new players will also spur efficiency and productivity in the system,” he added. A few mergers in local banking have been bailouts of private banks — ICICI Bank for Bank of Rajasthan, IDBI Bank for United Western Bank and Oriental Bank of Commerce for Global Trust Bank. Mergers among state-run banks (27 of them) had been mooted earlier, but we are far from it. Indian banks will be under pressure to raise capital as it is going at a premium. A year from now, they will have to migrate to Basel-3 guidelines; the cap-ad ratio will rise by 2.5 per cent to 11.5 per cent by March 2017. A Crisil estimate puts the amount needed at Rs 2,70,000 crore. While banks are adequately capitalised — barring one or two — pressure is on account of dud loans in infrastructure sectors especially power, aviation and telecom. The recent hikes in interest rate and slowing economic growth may also adversely impinge on the repayment capacity of some categories of borrowers especially those from the small sector. “We are at the cusp of a defining decade in the banking system,” said Chakrabarty.
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