The Hindu : Opinion / Editorials : Forced consolidation is not the way

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Wednesday, Apr 27, 2005

Opinion

Opinion - Editorials

Forced consolidation is not the way

The idea of having fewer, well-capitalised commercial banks in the place of the 27 government-owned banks to take on the imminent global competition is not new. In 1997 the Narasimham Committee II had advocated mergers among existing banks to create two or three global players and a dozen national banks. Despite more than a decade of financial sector reform that saw a slightly enlarged role for the private sector banks and foreign banks, the government-owned banks continue to dominate the banking business. However within the category of public sector banks, there is considerable heterogeneity: it is only the State Bank of India that finds a place in most lists of top global banks ranked by assets. Size is an advantage in a context where banking regulators the world over are prescribing larger capital adequacy norms for banks. Large banks can also better invest in and absorb the emerging technologies. A case has also been made out, though not convincingly, that bigger banks can transform themselves more easily into universal banks and provide a variety of financial services besides the traditional banking products.

The official view as articulated by Union Finance Minister P. Chidambaram, is that competition, convergence and consolidation will be the key drivers of growth in the financial sector. However forcing the pace of consolidation in the banking industry may not be the answer. Moreover, the idea bristles with practical difficulties. Nearly all the government-owned banks have outside shareholders. Their concerns will have to be taken into account as much as those of the government, the majority shareholder. Public sector bank employees, whose support will be critical to any successful merger exercise, are bitterly opposed to the idea. Every bank has a distinct culture and identity of its own and it will be extremely difficult to evolve a cohesive unit by merging two or more banks. The experience of the Punjab National Bank, which took over the New Bank of India, was most disappointing. More recent mergers such as the one involving the Global Trust Bank and the Oriental Bank of Commerce have been dictated by expediency; a well-run public sector bank was asked to rescue a private bank in distress. International experience points to the dangers in seeing mergers as a strategy for rapid growth. The world's biggest financial services group, the Citicorp, has grown to its present size by amalgamating one commercial bank, two investment banks, an insurance company, and a brokerage firm. Not only did the cultures of these disparate entities clash with one another, but the risk containment systems of the merged entity apparently failed in certain critical areas. Citicorp was rapped on the knuckles by regulators in several countries and has recently divested its insurance business.

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