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Consolidation of banks

Two recent unconnected developments have brought into sharp focus the issue of bank consolidation in India. Trade unions of all government-owned banks and a few private banks had issued a strike call to protest, among others, against the merger of public sector banks with one another. Although the strike did not materialise, it drew attention once again to the weakness of current policy measures that favour bank consolidation through executive fiat, even if it involved sid e-stepping some genuine concerns especially of the employees. The government might have underestimated the degree of opposition in the most recent proposal to merge the State Bank of Saurashtra with the State Bank of India, as a prelude to bringing all the associate banks under the SBI umbrella. It seems likely that the consolidation phase, whether involving banks in the SBI group or other public sector banks, will be put on hold. However, the deal struck for the takeover of the Centurion Bank of Punjab by the HDFC Bank, held out as an example of inorganic growth, shows how consolidation of private sector banks can, and does, take place even without a nudge by the government. It came about only because both the banks had gone through such mergers before reaching their present size, with their major shareholders acquiring a clear perception of the synergies of coming together.

There is no doubt that Indian banks need to scale up. Merger with one another is one way of gaining stature but such a process is best brought about over time and taking into account the special characteristics of the banks concerned. All government-owned banks have outside shareholders and the majority shareholder has to pay heed to their concerns. For them, the 1990s threw up intense competition as the newly licensed private banks endowed with adequate capital and an up-to-date technology platform sought to redefine banking experience for the retail customers. However, not all of them were able to grab a significant market share. In fact the laggard among them have been taken over by the more successful banks. Such market-driven consolidation is unlikely to happen in public sector banking. However, with the imminent applicability of Basel II norms and the easing of barriers for foreign banks, size will matter even more and hence the government needs to frame and articulate a clear strategy for consolidation.

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