Close on the heels of the Finance Minister P Chidambaram pitching for consolidation in the banking sector, the Reserve Bank of India feels that mergers and acquisitions in the sector are imminent.

"We are slowly but surely moving from a regime of 'large number of small banks' to 'small number of large banks'," said K J Udeshi, deputy governor, RBI.

"The new era is going to be one of consolidation around identified core competencies," she pointed out while speaking on the occasion of the Nani Palkhivala Memorial Oration recently in Jaipur.

She said the central bank was looking for such signs in respect of a number of old private sector banks, many of which are not able to cushion their non-performing assets, expand businesses and induct technology due to limited capital base.

In 2003, under the RBI's directive, the Kerala-based Nedungadi Bank was merged with Punjab National Bank.

"Mergers and acquisitions in the banking sector are going to be the order of the day. The successful mergers of HDFC Bank with Times Bank earlier and Standard Chartered with ANZ Grindlays have demonstrated that the trend towards consolidation is almost an accepted fact," she said.

The Indian Banks' Association, the bankers' apex body, has recently set up a committee to look into the intricacies of the mergers and acquisitions in the sector.

With regard to the much-debated, draft RBI circular on the ownership pattern of private banks, Udeshi said, "The draft guidelines do not cover foreign banks' investment in Indian banks, which will be released separately."

In a draft circular issued in July 2004, which is being amended subject to suggestions from the banking fraternity, the RBI has stated that a foreign bank with presence in India can hold a maximum of 5 per cent in an Indian private bank.

Udeshi said the policy for foreign banks' holding in Indian private banks would be consistent with the policy in the government press note of March 2004 to allow only one form of operational presence for foreign banks in India.