Allowing market forces to work their way through weaker banks being acquired by larger ones, is one way of looking at consolidation.

Bankers’ conferences are a platform to flag new or flog old ideas. Last week’s meet at Pune saw Finance Minister P. Chidambaram using the opportunity to reiterate a pet theme of his – of the need for consolidation among Indian banks. We must create at least 2-3 banks of international size as the Chinese have done, Chidambaram noted, repeating what he had also been espousing in his earlier stints as Finance Minister. In fact, this issue has been flagged ever since financial sector reforms got underway with the opening up of the Indian economy in the early 1990s, receiving real prominence with the second Narsimham Committee on banking sector reforms in 1998. It recommended merger among large Indian banks, leading to a three-tier structure where there would be three mega banks with global presence, 8-10 national-level banks and a large number of regional and local banks.

But all these have clearly not moved beyond the realm of ideas. While there are as many as six Chinese banks among the world’s top 50 banks ranked by total assets, that list does not have a single one from India, including the venerable State Bank of India (SBI). Again, it’s not that no one has tried. A few eager beaver chairman of public sector banks did make half-hearted attempts. But the problem here has been two-folds. The first, of course, is opposition from the unions. The fact that mergers generate economies of scale, reduce unnecessary duplication of infrastructure, and help greater access to global funds and talent pools — thereby enhancing the ability to take on higher loan and investment exposures — is all too well known. But the possibility of their also creating labour redundancies, as the unions believe, has made it difficult for an SBI to merge even its associate banks with itself, leave alone take over other banks.

The second problem has to do with leadership. The average tenure of a state-owned bank chairman doesn’t exactly lend itself to grandiose plans, which includes mergers and acquisitions. During the 2-3 years they usually have, much of the time goes in just keeping one’s head above water and avoiding any kind of confrontational situations. That may possibly explain why the two banking institutions to have witnessed real growth over the past decades – ICICI and HDFC Bank – are both in the private sector and whose chiefs have had sufficiently tenures to conceive of long-term visions for their organisations and progress towards actually implementing them. As far as consolidation goes, the Government should certainly encourage the process by creating a supportive environment. That includes giving more time and space to its own bank chiefs, enabling them to think strategically. This conscious encouragement, sans any imposition by writ, can go hand in hand with allowing market forces to work their way, through weaker banks being acquired by the ones with larger size and reach.

(This article was published on November 27, 2012)
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