Indian banking has been in the process of consolidation since 1961.The Banking Regulation Act 1949 gave powers to RBI to amalgamate weak banks with stronger ones.Majority of bank mergers in India so far have been by way of bail out of weak banks in order to protect the interests of depositors.This also had the objective of protecting the image and reputation of banks.The report of the committee on banking sector reforms [1998-second Narasimham committee report]however discouraged this type of mergers.The committee suggested multi-tier banking system.It suggested creation of 3to 4 global level players by means of mergers.It also suggested that 8 to 10 national level banks be retained and remaining smaller banks can remain as regional banks.In pre-reform era merger of banks was solely with a view to save weak banks from collapse as a result of continued losses and weak capital-base.New Bank Of India was merged with PNB as it was incurring losses continuously in three consecutive years.
Indian banking system has displayed considerable resilience even in times of recent acute global financial down-turn.Strong liquidity is another strength of Indian banks.As per the new policy foreign banks may expand their business in India in the coming years.Indian banks may have to face acute competition from them.The RBI report on currency and finance has opined that mergers may become necessary to face competition of foreign banks.Intermediation cost is very high in respect of Indian banks.This is an indicator of inadequate competitive strength.Hogh level of fragmentation especially among co-operative banks is a defect of Indian banking system.About 100000 small co-operative banks share about 4 percent of banking assets in the economy.Poor product innovation is another problem.Inadequate bank branches in many districts comes in the way of bringing about financial inclusion of the masses.Out of 611 districts in India 375 districts are underbanked.There is urgent need to expand branch network in these districts.According to a study by Ernest and Young India will require about 11600 additional bank branches by 2013 and another 20300 branches by 1018 for achieving desired penetration level of 74 percent and 81.5 percent respectively by 2013 and 2018.
Indian banks are not equipeed to face global competition.They can not competein the international level in terms of mobilisation of resources,funding of projects,investment etc.Lack of global size is a handicap for Indian banks.SBI,the largest Indian bank has only 57th place among top 1000 global banks based on tier-Icapital.In terms of assets SBI has only 70th place.ICICI bank has only 148th place in terms of tier I capital and 150th place in terms of assets.No other Indian bank has a place in the listof top 200 nbanks in the world in terms of tierI capital.SBI has only 8th place among the top 20 Asian banks.Industrial and Commercial Bank of China the biggest Asian bank is 4 times bigger than SBI in terms of tier I capital and assets.The combined assets of 5 largest banks of India namely SBI,ICICI Bank,PNB,Canara Bank,and Bank of Baroda are just about half of the assets size of largest chinese bank,Bank of China which is 3.6times bigger than SBI.
From the above discussion it is clear that consoldation of banks in India is a pressing necessity.
Advantages of Consolidation.
1Bigger banks alone can make huge investments for use of advanced technology.Foreign banks are technologically more advanced in terms of MIS,delivery mechanism,etc.Banks on consolidation can match them in this area by making required investment.
2.Larger banks can easily mobilise required equity because of their balance sheet size,book valueand stronger financials.
3.On consolidation bigger banks can cut costs involved in cetrain infrstructural items and by eliminating duplication .Number of administrative offices can be reduced and man power can be redeployed .Cost efficiency can be improved and profitability will increase.
4.On consolidation larger banks will have better risk bearing capabilities.Enlarged customer base will help impeove volumes of business.Market share will also increase.
5Economies of scale is a clear advantage for larger baks.Improved operational efficiency will be an advanatage.Better pricing of products will be possible.
6 Product innovation is possible for larger banks at lesser cost.
However there are disadvantages like difficulty in integration of technology and working platforms,increase in wage cost and difficulty in integration of heterogeneous work cultures.But the advantages outweigh the disadvantages.Hence consolidation is a must for Indian banking industry.
