The Hindu Business Line : `Small banks have a place amid consolidation trends'

SUCCESS FORMULA: Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, and Mr Ananthakrishna, Chairman of Karnataka Bank, at the Founders' Day meeting in Mangalore on Sunday. - R. Eswarraj

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Mangalore Feb. 18 Efficient small banks could survive alongside large and diversified financial institutions, although there may be an increasing trend towards consolidation in the coming years, according to Dr C. Rangarajan, Chairman of Economic Advisory Council to the Prime Minister.

Delivering the Founders' Day lecture on `Challenges before the Indian banking system' at the Karnataka Bank head office here on Sunday, he said that size is regarded as a major source of strength.

The key issue is whether the bank is operating efficiently. There is some evidence to suggest that banks of different sizes having different portfolio and cost structures behave differently.

Better customer service

Stating that some customers value personalised services, he said small banks might be in a better position to provide such services. Small banks also have much lower deposit volatility, and hence, less need for liquidity.

"Thus, although in the coming years there may be an increasing trend towards consolidation, it is felt that efficient small banks could survive alongside large and diversified financial institutions," he said.

Notwithstanding the increased process of consolidation of banks in India, a large number of small and medium sized banks continue to operate successfully. "Success is note synonymous with bigness. Small banks can be successful and can create a niche for themselves, as Karnataka Bank has shown. By meeting the local needs more effectively, Karnataka Bank can continue to grow stronger," Dr Rangarajan said.

Stating that the first stage of the banking sector reform has come to an end, he said the second phase of reform would have to be on improvement in the organisational effectiveness of banks and other financial entities.

Greater specialisation by banks in different niches of the market; greater reliance on non-fund business; greater overlap in product coverage between commercial banks and non-bank financial intermediaries; and greater financial dis-intermediation with large companies accessing securitised debt domestically and from financial markets abroad could be the trends that may tend to dominate the future course of banking development in India, he said.

He said that banks would have to equip themselves to operate in a deregulated interest rate environment. As banks would be increasingly subject to interest rate risk with fluctuation in the interest rate, special attention would have to be given to developing the necessary treasury management expertise while managing their investment portfolios.

No longer an option

Small and marginal farmers require special attention with respect to provision of credit, as they constitute a bulk of the farmers.

Dr Rangarajan said that financial inclusion is no longer an option; it is a compulsion. Banks need to think deeply on how to meet this challenge of meeting the credit needs of marginal farmers.

Presiding over the function, Mr Anantakrishna, Chairman and Chief Executive Officer of Karnataka Bank Ltd, said that a kiosk type of banking could be thought of to implement the financial inclusion programme.

"A kiosk type of banking in rural area with one person and a machine should be thought to help rural people. This will help banks to reach more people in rural areas," he said.

Customer demand is changing at a fast pace than the staff members change their attitude towards work in old private sector banks and public sector banks. In this regard, a better training is needed for the staff members, he added.

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