Veteran banker Deepak Parekh has urged the government to pursue further consolidation of public sector banks and allow higher foreign investment. Speaking at the Indian Merchants' Chamber annual meeting, he also highlighted the need to double the size of India's corporate bond market and address the ongoing housing supply shortage.
What Happened
Deepak Parekh, the veteran former chairman of HDFC, has proposed significant structural changes for India’s banking and financial sectors. Speaking at the Indian Merchants' Chamber (IMC) annual general meeting, Parekh argued that the government should look at further consolidation of public sector banks (PSUs) to create fewer, larger, and more robust institutions. He also suggested increasing the foreign direct investment (FDI) limits in banks, both public and private, to attract more global capital.
Parekh noted that the ideal time for such reforms is when the banking sector is healthy and performing well, rather than during a crisis. This suggestion comes as India aims to meet its long-term growth and employment targets.
Why Consolidation and FDI Limits Matter
The call for PSU bank consolidation is aimed at creating banks with stronger balance sheets and better operational efficiency. When smaller banks merge, they can often reduce overlapping costs and improve their ability to handle large-scale lending. However, investors should note that past mergers have historically involved integration challenges, such as reconciling different work cultures and technology systems.
Regarding FDI limits, Parekh argued that raising the cap could bring in fresh capital, which would strengthen bank capital buffers. Currently, FDI in private banks is capped at 74%, while public sector banks have a much lower limit of 20% through the government route. Any change in these limits would require significant policy shifts by regulators.
The Need to Expand Corporate Debt Markets
Parekh also emphasized that India’s corporate bond market remains underdeveloped compared to the size of its economy. Currently, the corporate bond market is estimated at about 18% of the country's GDP. He argued that to fund the nation's substantial investment needs, this market needs to double in size.
Expanding the debt market is important for investors because it gives companies a way to borrow money outside of the traditional banking system. This reduces the risk for banks and provides more options for companies to fund their growth. Parekh suggested that moves like adopting cross-border securitization and enhancing credit mechanisms could help foster a more active municipal and corporate bond market.
Market Resilience and Retail Confidence
Despite recent volatility and foreign portfolio investors being net sellers of roughly $50 billion in Indian equities over the past 18 months, Parekh pointed out that the domestic market has remained resilient. He attributed this strength largely to domestic institutional investors, specifically the consistent monthly inflows of around ₹30,000 crore from retail Systematic Investment Plans (SIPs). This regular flow of money from Indian households has provided a cushion against foreign outflows, helping the market maintain stability.
Challenges in Housing and Employment
On the housing front, Parekh highlighted a major supply-demand gap. He pointed out that while there is a projected shortage of 30 million units over the next five years, the current supply is only around 600,000 units annually. Furthermore, he noted that much of the new supply is skewed toward luxury housing, leaving a gap in affordable homes. Investors tracking the real estate sector should watch how companies address this imbalance between supply and demand.
Finally, he addressed concerns regarding job creation and the rise of Artificial Intelligence (AI). Parekh believes AI is an opportunity for IT services rather than a threat, but reiterated that India needs to create 10 million jobs annually across all sectors to meet its growth requirements.