Chairman of the Prime Ministers economic advisory council, C. Rangarajan, says public sector banks should opt for mergers and acquisitions only if they stand to reap commercial gains and should not be compelled into consolidation.

Any process of consolidation must come out of a felt need for merger rather than as an imposition from outside, Rangarajan, a former governor of the Reserve Bank of India, said at Bancon, the bank industrys annual conference. The synergic benefits must be felt by the entities themselves.

The government and the regulator should only play the role of a facilitator in the commercially-driven process, he added.

The government has for long held that a consolidation of public sector banks, which account for three-quarters of the banking industrys assets, may improve the state of the lenders by increasing their size and reach. But it wants any such moves to be initiated by the banks management.

Rangarajan warned that while bank assets have to expand in tandem with the economy, the ability of public sector lenders to meet the increasing need for finance to fuel economic growth would be inhibited unless the government is willing to bring in more capital.

While this constraint (of limited capital) may not be binding immediately, sooner or later it will be, especially when economic growth accelerates, he said.

The minimum government holding in public banks is mandated at a minimum 51%. In many banks, the government holds a stake just above this limit, restricting its scope to dilute the stake further and reinforce their capital base.

An alternative to this could be to include in the definition of the government such entities as the Life Insurance Corp. (LIC) that are quasi-government in nature and are likely to remain fully owned or an integral part of the government system in the future, Rangarajan said.

Entities such as LIC also hold stakes in banks and by including them in the definition of the government, their stake can be diluted to raise capital for the lenders.

Rangarajan asked public sector banks to give special attention to small and marginal farmers.

A relook at the organizational structure of our rural branches is called for. Banks need to think deeply on how to meet this challenge of meeting the credit needs of marginal farmers, he said.

Rangarajan said the country needed to ensure an adequate supply of foodgrains to stem a steep rise in food prices. He added that some reduction in liquidity may help in containing inflationary pressures, but did not specify a tool that could be used for this.