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Bank mergers mooted to beef up capital
June, 24th 2009

The Chairman and Managing director of the Central Bank of India, S. Sridhar, said the idea of merging public sector banks is perhaps being mooted to strengthen the capital base of the banks, Mr. Sridhar said on the sidelines of a panel discussion organised by the Commonwealth Secretariat on Micro, Small and Medium Enterprises (MSME) and the global economic slowdown in Bangalore on Monday.

Asked whether bankers are worried about the increase in the fiscal deficit, Mr. Sridhar told The Hindu that although there were some apprehensions that higher government borrowings might crowd out private borrowings and result in higher interest rates, this had to be balanced by the possibility that the higher deficit might provide an impetus to demand in the economy.

Mr. Sridhar said MSMEs, which contributed more than one-third of the countrys exports, were badly affected by the synchronised downturn in the global economy. Unlike past episodes of recessions, a recovery from this crisis is unlikely without a coordinated response from all major nations, he said. The crisis has resulted in a fall in demand for goods and services. People are saving, not incurring personal debt and want to avoid risks, he said. The most severe impact has been on weaker sections such as small and marginal farmers, people working in informal occupations and MSMEs, he said.


The crisis had resulted in a trend towards re-regulation in the financial sector across the world, Mr. Sridhar said. Old-fashioned bankers who did not indulge in a high degree of leverage during the boom are now having the last laugh, he said. Banks which wrote off the loans of small farmers have emerged unscathed from the crisis.

As a result of the crisis, the working capital cycle of MSMEs has become elongated, Mr. Sridhar said. They find the need to hold inventories longer and that payback periods are now longer, he said. The managements of MSMEs are now under greater pressure to find markets and managerial talent, especially those who can contribute to innovation which results in changes in processes in their units during these tough times, Mr. Sridhar said.

He said a dedicated credit rating agency exclusively meant for rating MSMEs would help reduce risks for lenders.

He suggested greater flexibility in lending, taking into account borrowers ability to pay.

He said banks such as his were now providing factoring services to MSMEs that supplied to large corporates. This, he said, reduced the burden on the working capital requirements of MSMEs. Central Bank of India planned to increase its loan portfolio to MSMEs by 35 per cent during the current year. At present, the sector accounted for about eight per cent of the banks advances. Mr. Sridhar said the bank hoped to increase the share of this sector to 10 per cent in 2009-10.

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