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Private banks: Game changers in Indian banking

CHENNAI: The entry of private banks with high efficiency operating models, deployment of integrated technology platforms, new risk paradigms and above all, the emergence of highly demanding customer segments have all contributed to transformation in the banking sphere, according to the recently released ICC-KPMG Banking report.

"We believe that for India to achieve the GDP growth rate of 6-7%, the banking sector will have to play a pivotal role. Banks will have to focus on emerging middle India, rural customers and MSME (micro small and medium enterprises) sector especially in the eastern and north eastern states," Ambarish Dasgupta, head, management consulting, KPMG, India said.

A major trend highlighted by the report was that raising of capital by 
public sector banks could be a problem in the future. "Assuming an annual credit growth rate from FY12-FY21 at 20% and the annual risk weighted asset growth rate at 22%, KPMG expects the Tier-I capital requirement for public sector banks for the same period to be in the range of Rs 9,60,000 crore. The government's intent to not dilute their stake leaves them with few options," the report said.

The report went on to add that the government could consider creating a holding company (Holdco) and transfer its stake in the PSBs (public sector banks) to this company. The Holdco can raise long term debt from domestic and international markets to infuse equity in the PSBs and act as an investment company for the Government of India. Another option for the government could be to consider diluting its stake in PSBs through issuance of differential voting rights (DVR) such that the economic stake dilution is also kept to the minimum. The Government may also consider in the future on having a golden share in each of the PSBs under which while the Government's economic and voting stake may fall below 51%, it will always have the right to control the respective PSBs due to the possession of this golden share.