The Hindu Business Line : Banking on consolidation

The Finance Minister, Mr P. Chidamabaram's warning that Indian banks would be reduced to small players if they don't get rid of the mental block against consolidation may act as a trigger for increased mergers in the banking space.

Though bank managements have taken a favourable view of consolidation, it is the attitude of the trade unions — whose views have been strongly endorsed by the Left parties — that raises concern.

They justify their resistance by arguing that consolidation results in a) downsizing, and b) providing private players easy access to a large base of low-cost capital. While this may be an inevitable outcome of such an exercise, it is a small price to pay for the larger benefits that consolidation will bring.

First, owing to greater scale and size, consolidation can help save costs and improve operational efficiency. Second, with the estimated capital infusion for banks pegged at Rs 42,000 crore by March 2010, consolidation could be the superior alternative for banks to shore up their capital base.

Post-April 2009, the banking landscape is likely to change dramatically, giving foreign banks a level playing field. With Mr Chidambaram's message carrying a clear warning, the onus is now on banks to initiate measures to set the consolidation wave in motion and gear up for the post-2009 challenge.

It remains to be seen whether the Left will adopt the right approach in taking the long-pending process to its logical conclusion.

Radhika Kamath

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