However, it admitted that the entry of foreign banks would increase efficiency and infuse technology, skill management and superior risk management practices.

The report also pointed out that the majority ownership in public sector banks was a hurdle that needed a solution. The present floor of 51 per cent government holding in state-owned banks was an issue that merited consideration in view of the need of these banks to raise capital and the changing environment.

In terms of the present provisions of the law, government equity in public sector banks cannot be less than 51 per cent. This can become an issue hampering the growth of public sector banks if the government is not able to provide adequate capital for expansion of public sector banks. Thus, there would be need to find a durable solution to the problem, whereby either the government contributes to the capital of banks or allows banks to raise capital from the market, the RBI report said.

Advocating mergers and acquisitions in the Indian banking sector, RBI, based on empirical evidence, has found out that the industry could be characterised as a “monopolistic competitive structure”.

The consolidation process in the banking sector that is already underway could accelerate in future in view of several developments such as the planned review of the roadmap of foreign banks and implementation of Basel II.

RBI cautions Government

The RBI has a word of caution for the finance ministry. It has warned that Central finances might come under pressure this fiscal on account of implementation of the Sixth Pay Commission award including payment of arrears, higher oil subsidies, increase in fertiliser subsidy due to a sharp rise in the price of raw materials and fertiliser in the international market. It also said volatile food and energy prices were other concerns.