As the Indian economy and banking sector grows and capital requirements rise, the Centre has a large scope to reduce its stake in public sector banks (PSBs), bankers said in an event held at the NSE here today.

“Consolidation is something which the government has to finally decide. From the point of view of equity capital percentage of government, it can be definitely brought down significantly. In future there will be requirement of capital as banks and the economy are growing,” said Rajneesh Karnatak, MD & CEO, Bank of India.

Debadatta Chand, MD & CEO, Bank of Baroda, meanwhile said further consolidation among PSBs is the government’s call, but the last round of PSB mergers has increased the scale of the existing PSBs.

In 2019, the Centre had announced mega consolidation, with 10 PSBs consolidating into four large ones. Oriental Bank of Commerce and United Bank of India merged with Punjab National Bank; Syndicate Bank merged with Canara Bank; Andhra Bank and Corporation Bank merged with Union Bank of India; and Allahabad Bank merged with Indian Bank. Prior to this mega consolidation, Vijaya Bank and Dena Bank had merged with Bank of Baroda with effect from April 1, 2019.

CASA pressure continues

The bankers also reiterated that gaining low-cost current account and savings account (CASA) has become a challenge for the banking system.

“CASA is a challenge today for PSBs. Personally, I see that current account will get diminished more rapidly in this changing environment because a lot of current account in banking system was from the government side, both Central and State governments, and from Central and State PSUs,” Karnatak said.

He added that the both the government and private sector companies’ working capital cycle has enhanced, lowering the need to park funds in current account. With sweep-in and sweep-out facility available for savings account, average balances in such accounts is moderating. Karnatak said banks will have to offer better products alongside savings accounts which cater to customers’ all financial services needs and banks must also deepen the digital infrastructure to accrue online deposits.

Chand, meanwhile, noted that more customers are parking funds in fixed deposits and other market instruments due to higher return, as against lower yielding CASA.

“There is a change in preference leading to slightly lower deposit growth. My sense is that with all benefits available in savings fund deposit, where you can do all operations almost at free charge, I think the product will stay. Deposit growth would be slightly lower but it is a critical product for the banking system,” he said.