Is the Finance Ministry preparing the ground for consolidation among public sector banks (PSBs)? Its recent missive to the 26 PSBs seems to suggest so.

The Ministry said there is a need for continuous interaction between these banks to improve their functioning.

This can be achieved by sharing experiences and lessons learnt which in turn will help fine-tune internal policies and procedures.

Seven large PSBs – State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BoI), Union Bank of India, Central Bank of India and Canara Bank – have been assigned the responsibility of co-ordinating the activities of 19 other PSBs in six specific areas of operation.

The areas of operation with scope for functional improvement human resources, business process re-engineering, e-governance, internal audit for fraud detection and protection, recovery, and asset-liability management.

The 26 banks have been divided into seven groups. SBI has been given the responsibility of co-ordinating the functioning of its five associate banks.

PNB is the co-ordinator for Dena Bank and Vijaya Bank, BoB for IDBI Bank and UCO Bank, BoI for Oriental Bank of Commerce and Andhra Bank, Union Bank of India for United Bank of India and Punjab & Sind Bank, Central Bank of India for Indian Bank, Allahabad Bank and Bank of Maharashtra, and Canara Bank for Indian Overseas Bank, Syndicate Bank and Corporation Bank.

The group coordinators of the banks would interact with the Ministry on a quarterly basis.

It may be pertinent to note that the RBI-appointed Narasimham Committee on Banking Sector Reforms had, in 1998, recommended restructuring of the domestic banking system.

The committee recommended that the banking landscape should evolve in such a way that there should be three to four large banks, which could become international in character, and eight to ten national banks and local banks confined to specific regions. Rural banks, including Regional Rural Banks, are confined to rural areas.

Though it has been 14 years since the Narasimham Committee report was put together, there has been no serious attempt at consolidation in the public sector banking space. SBI, which has assimilated two of its associate banks – State Bank of Saurashtra and State Bank of Indore – is the only exception.

Industry observers say that consolidating the banking sector will lead to economies of scale, greater efficiency and help resultant entities take higher loan exposures in a growing economy.

According to the latest RBI data, as of December-end 2011, public sector banks accounted for about 74 per cent of deposits and advances in the banking sector.

ramkumar.k@thehindu.co.in

(This article was published on November 23, 2012)
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