Bank consolidation has again
come to the fore with recent initiatives of finance ministry for new banking licenses
and renewed discussion on India’s diminutive banking. India is the country of
spate of small banks and a handful number of big-banks. Amalgamation of these
small and big public sector banks is imperative otherwise it would badly lag
behind in global banking system. However, large-size banks aren't immune to risk.
Massive bank failures in USA and Euro zone are a loud word of caution for big
banking operations.
It is a coincidence that USA
and Europe are now trying to bring global banks under tight regulation while
India is looking for a Desi model of global banking. Finance minister P.Chidambaram
has expressed the need for India to have world-size banks to meet the requirements
of India’s growing economy. USA and EU markets are a frightening tale of big
banks. Risk inclined, greedy and casual approach of big banks had led to the toxic
securities and real estate investments. This has resulted into the collapse of
Lehman brothers and quite a few big banks across the USA and EU. EU and USA regulators are trying to ring-fence
the banks and pushing them for a separation of core banking (deposit and
lending) and investment operations.
Merger of small banks with big
banks is necessary for the country if it is to create its international
footing. The present scenario of Indian banking is not conducive to vie
globally. According to ASSOCHAM chief, 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 and in terms of assets, India’s largest bank SBI is
world’s 70th largest bank and India’s largest private sector lender
ICICI Bank Ltd. stands at 148th position. None of the other Indian
banks features among the top 200 banks in the world-in terms of size of assets.
Many Indian banks, especially public sector banks, cooperative banks and
regional rural banks are unprepared for the implementation of Basel norms due
to capital inadequacy. These norms demand capital allocation for operational
risks in addition to credit and market risk. With this view, small banks must
go ahead with consolidation in order to achieve capital adequacy.
Apart from this, India is not
well penetrated with banking. A good chunk of areas are still under-banked,
even non-banked. Merger of two banks with the prospect of targeting far off
places would flourish the banking system in India internally. Indian Govt. is
going to launch the system of giving subsidies through cash transfer which can only
be possible if banking reaches to the grassroots of India . Large size banks can feasibly take their business to remote
areas devoid of banking.
Chidambaram did advocate
banking consolidation but did not come up with the process as to how and under
which rules and laws it should be done. Merging two banks is not an easy step. Most
of the Indian banks are at the different stages of technology
implementation. Technology platforms,
system platforms, network architecture, database vendors etc are usually
different in different banks, which must be made compatible before merging the
two. Heterogeneous culture of the two banks must also be critically considered.
Staff of both the banks must be taken into confidence so that they can
accommodate well in changing work-place environment. Regulatory norms must also
be paid due attention.
India is in the dire need of
large-banks in order to go with the international banking standard but it must
not forget what had happened in USA and EU. When A developed country like USA
could not yet recuperate from the economic crisis its banks had led it into how
a developing country like India would handle the situation if at all its banks
falter. Therefore proper procedures of merger and acquisition and the
safeguards in the event of mishap must be well-crafted and documented
beforehand if banking consolidation is to be done. Large-banks are not a panacea.
It has its own side effects. Indian banks must always be vigilant towards the
fact that Lehman Brothers was too big to fail but actually it did.
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