Finance minister P Chidambaram, yesterday said that the government would encourage consolidation within public sector banks and would help bring about a favourable legislative framework that would facilitate mergers.

However, he said that the decision on the actual process of mergers would be left to the boards of the banks. "We are not going to push for consolidation. However, if banks want to consolidate we will not come in the way," Chidambaram said after a meeting with chief executives of public sector banks.

He said that legal amendments, including minor ones required in the Income-Tax Act, would be brought about to remove any hurdles in consolidation. "We need a small amendment in the I-T Act which would be carried out in February next," Chidambaram said.

Chidambaram also said that the government would encourage banks to raise further capital by way of public issues. "I have encouraged them to go to the capital market," he said.

On the interest rate movement, Chidambaram said that he expected stability in interest rates in the medium term. "In the medium term, interest rates are expected to be stable. That is my assessment," he said. The finance minister said that there was excess liquidity in the market and banks would be encouraged to lend.