Financial Sector Consolidation: A Need for Flexibility

RBI Needs to Revisit Investor Criteria, Support Financial Sector Consolidation: M Rajeshwar Rao​

Calls for Regulatory Flexibility to Enable Growth and Capital Formation​

Mumbai, March 18 Former Reserve Bank of India Deputy Governor M Rajeshwar Rao on Wednesday urged a re-evaluation of investor eligibility criteria, stressing the need for stronger financial institutions to support India’s growth ambitions.

Speaking at an event organized by Assocham, Rao said that as the economy expands, the financial sector must be equipped with adequate capital and structural strength to sustain that growth.

“The challenge lies in finding suitable investors and complying with regulatory requirements. The Reserve Bank and the government need to carefully examine these regulations,” he stated.

Push for Consolidation Across Financial Sector​

Rao highlighted the importance of consolidation, particularly in private sector banks, to improve capital access and operational strength. He suggested that regulators, including the RBI, may need to introduce flexibility to facilitate mergers and capital raising.

“Perhaps it is time for regulators to consider some flexibility for consolidation and capital raising by private sector banks,” he said.

He added that consolidation should not be limited to banks alone but extended across the broader financial services sector to create stronger and more competitive institutions.

Strong Financial Institutions Key to Long-Term Growth​

According to Rao, India’s ambition to grow from a $4 trillion economy to nearly $30 trillion by 2047 will require a proportionate expansion of the financial sector.

“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,” he said.

Banking Sector Consolidation Already Underway​

Rao noted that consolidation has already taken place in the public sector banking space. The number of public sector banks has reduced significantly from 27 in 2000 to around 12 currently. Similarly, regional rural banks have declined from 196 to 28.

However, he cautioned that continued growth would require substantial capital infusion.

“If not privatized, these entities will require capital from the government,” he said.

Need for Innovative Capital Raising in PSBs​

While disinvestment and increasing foreign investment limits remain available options, Rao emphasized the importance of exploring innovative mechanisms to raise capital in public sector banks.

Concerns Over Cooperative Banks and NBFC Fragmentation​

Rao also flagged challenges in the cooperative banking sector, particularly in adapting to technology-driven banking services and maintaining competitiveness.

On non-banking financial companies, he pointed out that out of approximately 9,300 NBFCs, only about 300 are financially strong, with the rest being relatively small.

“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.