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India’s Rangarajan Says Banks May Use Mergers to Ensure Growth

Indian banks may acquire rivals to boost profitability, said C. Rangarajan, chairman of the Indian prime minister’s economic advisory council.

“As the bottom lines of domestic banks come under increasing pressure and the options for organic growth exhaust themselves, banks in India will need to explore ways for inorganic expansion,” the former governor of India’s central bank said at banking conference in Mumbai yesterday. “Any process of consolidation must, however, come out of a felt need for merger rather than as an imposition from outside.”

Any consolidation among public sector banks, which account for three-quarters of the bank assets in India, must be driven by commercial motivation by individual banks, with the government and the regulator playing at best a facilitating role, Rangarajan said.

In August, ICICI Bank Ltd. bought out Bank of Rajasthan Ltd. in a deal valued at as much as 27.9 billion rupees ($618 million). In the past five years, there have been transactions totaling as much as $3.7 billion, according to data compiled by Bloomberg.

The international financial crisis has highlighted regulatory failure in the developed world and new regulations should be in place to prevent “regulatory arbitrage,” Rangarajan said.

Credit risk remains a major issue in the banking system. An increased exposure to real estate and infrastructure would lead to longer maturity of bank assets, he said.

“Excessive risk taking and leveraging by banks needs to be discouraged by appropriate regulatory measures or controls,” Rangarajan said.

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