Is consolidation of Indian Banks, the need of hour?

As India prepares for competitive times, more banks are planning to combine for competitive advantage . The Raghuram Rajan Committee, in general, has recommended to encourage, but not force, consolidation amongst Public Sector Banks (PSBs). The Committee has observed that given the fragmented nature of the Indian banking system and the small size of the typical bank, some consolidation may be in order for banks that aim to play on a larger stage.

Indian Government in a recent statement has said that the initiatives for consolidation amongst the PSBs should emanate from the management of the banks themselves with Government playing a supportive role as the common stakeholder.

In a recent analysis of total assets of India’s ten largest banks vis-à-vis size of it’s GDP at end of fiscal 2008-09, assocham has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates. Combined assets of top ten banks constitute less than 60 per cent of the GDP unlike the banking system of European economies, where even after the global financial turmoil, assets of only top five banks has grown to four times of GDP.

Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, the ASSOCHAM Chief said, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital - a core measure of a bank’s financial strength that consists largely of shareholders’ capital.



Similarly, in terms of assets, India’s largest bank, SBI is now the world’s 70th largest bank. On the other hand, ICICI Bank Ltd, the largest private sector lender has attained the 148th position. None of the other Indian banks features among the top 200 banks in the world-in terms of size of assets.

Assocham feels that hampered by the fragmented nature of the banking industry, Indian banks are not able to compete globally in terms of fund mobilisation, credit disbursal, investment and rendering of financial services.The balance sheets of top 10 Indian banks suggest the greater scope of consolidation to reap the benefits of large sized globally competitive Indian banks. Assocham has called for Bank’s consolidation without any delay despite dithering of Reserve Bank of India on the issue.

General consensus is that more bank mergers may be inevitable. India needs to slowly but surely move from a regime of large number of small banks' to `small number of large banks .... Read more

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