A nudge from the largest shareholder — the government — may be one way forward to ensure consolidation among public sector banks when they themselves are not coming forward voluntarily, according to R Gandhi, Deputy Governor, Reserve Bank of India.

Referring to the Finance Minister’s Budget speech of 2016-17, wherein he mentioned that a (consolidation) roadmap will be announced soon, Gandhi felt that an approach in this direction may be constitution of an expert committee which may thoroughly examine the business of each public sector bank (PSB), their forward looking business plans and try to find out opportunities of consolidation based on sound business strategy and synergy in the operations of the banks concerned.

“The areas of synergies are to be properly identified encompassing, inter alia , compatibility of businesses, culture, treasury and IT and locational advantage. The committee may interact with the boards of banks on the tentative plans it might be having with respect to individual banks and try to understand their reactions.

“Further, interests of all stakeholders like depositors, borrowers, supervisor, employees, etc., also need to be balanced. Perhaps, the recently constituted Banks Board Bureau can perform such an advisory role,” said Gandhi at a recent banking conference in Bengaluru.

He emphasised that PSBs are listed and their shares are held by diversified private institutions and individuals and interests of these minority shareholders need to be protected.

“Any plan for merger or acquisition has to be a Board-led process in which all stakeholders have to be involved from beginning… the aspects related to competition and consumer protection need to be evaluated diligently in the context of consolidation,” the Deputy Governor said.

He observed that the need for consolidation is specially felt now, due to the fact that although India is the seventh-largest economy in the world in terms of nominal GDP, there is no Indian bank in the list of 70 large banks in terms of asset size.

“We can easily see that large banks reap certain advantages in terms of efficiency, risk diversification and capacity to finance large projects. The efficiency gains resulting from lower cost of services and higher quality of services are too attractive to ignore.

“It is also felt that a larger bank may be less risky than a smaller one as the larger bank will have a more diversified portfolio resulting in less volatility in its earnings. Consequently, a large bank may command higher credit rating than a smaller bank,” said Gandhi.

There are 48 domestic banks (excluding regional rural banks and local area banks), of which 27 PSBs have a market share of around 70 per cent in terms of asset size. A comparison of the performance of larger and smaller PSBs does indicate that larger ones perform better.

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