This is with reference to “Public sector banks must hasten with consolidation” and the editorial “Banking muscle” (Business Line, November 27).

The Finance Minister is once again pitching for consolidation among the public sector banks (PSBs).

It makes sense that in this increasingly globalised environment, the country will need to have at least two to three global size banks that can take on greater challenges.

The debt market is underdeveloped in India and the industry depends to a large extent on banks for funding. The projects now being taken are on global scale and need large funding.

It is now learnt that the 26 PSBs have now been divided into seven groups.

While SBI has been given the responsibility of coordinating the functioning of its five associate banks, six other group leaders have been given the responsibility of co-ordinating the activities of the remaining 14 PSBs. Whether or not this is a prelude to merger exercise is not known, but it will certainly be a good step in moving towards consolidation.

Bigger banks will have a high risk-bearing appetite and can perform relatively better in the increasingly uncertain environment that warrants frequent realigning of policies and systems in tune with the prevailing market forces.

Credit is still under penetrated in India, with bank loans constituting just over 75 per cent of GDP as against over 100 per cent in other economies. Besides, PSU banks are being leveraged by the Government to rapidly expand their reach to un-banked areas; only large banks reaping economics of scale would be able to sustain this cost.

Consolidation in the public sector banking space will shore up the capital base of the merged entity, besides achieving economies of scale and enhancing geographical reach. For a meaningful proposition, it should be preceded by internal restructuring of the banks.

S. Umashankar

Nagpur

(This article was published on December 7, 2012)
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