The finance ministry has stated in its latest report on the services sector that predominance of government ownership in the banking sector has led to insufficient competition in the Indian banking system, while increasing the cost of intermediation.
The report says, ?While the share of public sector banks in total assets has declined 10% between 1991 and 2001, and at the present 80% share, the public sector ownership of the Indian banking system remains one of the highest in the world.?
Quoting a World Bank study, the report says lack of competition in the banking industry has lowered the efficiency of capital allocation and led to under-lending in to the private sector. The public sector banks have also been saddled with excessive labour and higher non-performing assets (NPAs) relative to new private sector banks as well as foreign banks.
The report, however, does not make any recommendation on whether the government should consider reducing its stake holding in the public sector banks.
Finance minister P Chidambaram has also on Tuesday ruled out lowering government stake in Public Sector Banks to below 51%.
The ministry working paper suggests that banks would have to strengthen themselves through consolidation.
?Indian public and private sector banks and financial institutions have to adopt international practices and strengthen their capital base through mergers & acquisitions before launching operation in the highly mature international financial markets,? states the report.
The operationlisation of the offshore financial centres can possibly be the first step, it says. The report also suggests the government to facilitate better financing of the service sector exports. For the insurance sector, the report states that a political consensus has to emerge before any headway can be made in raising the foreign direct investment cap in the sector from the present level 26%.