Mumbai, March 18 Former Reserve Bank Deputy Governor M Rajeshwar Rao on Wednesday called for a "re-evaluation" of the criteria for investors.
Rao, who retired in September last year, said that a growing economy aspiring to accelerate economic growth will need strong financial institutions to support this expansion.
Speaking at an event organized by industry body Assocham here, he said, "The challenge lies in finding suitable investors and complying with the regulatory requirements. The Reserve Bank and the government need to carefully examine these regulations."
Referring to improvements in the sector through measures such as more principle-based regulatory frameworks, stronger governance frameworks, and supervisory oversight, Rao emphasized the need for the RBI to show some flexibility to facilitate consolidation in the sector.
"Perhaps it is time for regulators to consider some flexibility for consolidation and capital raising by private sector banks," he said.
Beyond private sector banks, there is a need for consolidation across the financial sector to support long-term growth ambitions, he said.
"We need strong players, and for this, besides access to capital, the option of consolidation in the financial services industry will also need to be considered," Rao said.
Rao added that a $4 trillion economy aspiring to grow to about $30 trillion by 2047 needs the financial sector to grow commensurately or even more.
In the banking sector, Rao noted that consolidation has already taken place. The number of public sector banks has decreased from 27 in the year 2000 to about 12 currently, he said, adding that regional rural banks have been reduced from 196 to 28.
However, he cautioned that growth will require capital. "If not privatized, these entities will require capital from the government," he said.
He also said that while disinvestment and higher foreign investment limits are options, there is a need to explore more innovative options for raising capital in public sector banks.
Rao also highlighted concerns in the cooperative banking space, pointing out that they will face challenges in competing and in offering technology-driven banking services.
On non-bank lenders, Rao said there are around 9,300 NBFCs; only 300 have sufficient strength, the rest are relatively small NBFCs.
"We may need a smaller number of financially stronger and better-regulated entities, and the challenge of consolidation in this segment is something we need to plan for," he said.