'Pvt sector banks must consolidate' Mumbai: The Centre on April 1 said it preferred consolidation of private sector banks over the state-owned ones to emerge as strong entities instead of "functioning on a regional or communal basis'.

"Mergers are bound to happen. I want strong banks (private) to emerge instead of them working on a regional and communal basis," Union Finance Minister Yashwant Sinha said in his key note address at Banking Summit 2002 organised by the Confederation of Indian Industries (CII) in Mumbai.

Sinha said government was not focussing on public sector banks for such consolidation at the moment but "it was watching the situation".

Admitting that regulatory reforms have not been followed by structural reforms, the minister said this has led banks to invest highly in government securities.

"Public sector banks invest more in government securities due to stringent capital adequacy ratio norms and every loan has to be risk weighted," Sinha said adding the bank top management preferred government securities as they carry low risk weight and also avoid any possible investigation from the Central Vigilance Commission and the CBI.

"As a result banks are loaded with government securities far in excess of regulatory requirements like Cash Reserve Ratio and Statutory Liquidity Ratio," he added.

On the rising non-performing assets (NPAs) of the banks, the minister said the government will soon strengthen the mechanism to deal with wilful defaulters to enable banks to deal with these entities more aggressively and effectively.

Sinha said the 'blurring lines' between the functioning of a development financial institution and banks posed a greater challenge in the Indian financial sector.

"Banks account for 75 per cent of the industrial expansion portfolio, who will give term loans now? the banks have been traditionally extending working capital loans and the question is will they have a capital base to give term loans of five to seven years duration," he questioned the bankers community present at the summit.

On setting up of Asset Reconstruction Companies (ARCs), Sinha said these entities would be able to deal with bad assets which could be restructured and sold to the buyers.

"ARC is not a disguised mechanism to put public money in banks but improve the environment for finding buyers for the bad assets," he added.

On priority sector lending, Sinha said the government cannot afford to dispense with it.

"Priority sector lending will have to continue and so also social obligations," he said adding that the practice was not a bad business and had been successfully implemented by self-help groups in remote areas of the country.

PTI