Addressing the IBA global banking conference on Thursday, the SBI chief said: "There is no choice. Sooner or later, the game of merger will have to be played."

Elaborating on the issue, Verma said: "This is an inevitability. The question is: when should we go for mergers? I see mergers of smaller banks in the immediate future while big banks will be merged when the legal and social issues are settled. We need to rationalise the workforce to make mergers effective."

The market forces will "force" merges within next three to five years, he said. According to the SBI chief, the rationalisation of workforce is the precondition of merger as mergers and acquisitions are meant to reduce the cost of delivery."Unless the workforce is curtailed, mergers will not be cost efficient. Hence we need legal changes to enable banks to reduce the workforce," he said.

RBI governor Bimal Jalan said the central bank would not force mergers on the industry. "If the individual banks can find this route profitable on the strength of their synergies, then it is welcome. It cannot be mandated from the above," Jalan had said. The second Narasimham panel of banking sector reforms strongly recommended mergers and acquisitions for consolidation in the banking industry.

Verma made a strong case for setting up an SRO in the banking industry to closely monitor activities of banks, lay down ground rules and settle disputes among banks. "In the liberalised milieu, regulation and self-regulation will go hand in hand," he said.

Incidentally, the Khan panel on harmonisation of roles of banks and financial institutions has recommended creation of a super regulator in the financial sector.

In sharp contrast to the Khan panelrecommendation on universal banking, Verma said banks should opt for particular niches instead of becoming a financial supermarket. "The banks will have to be on the constant lookout for new avenues for earning income. Innovation of new banking products and more than that their own innovative repositioning in the market will be the key to success in future," he said.