A report on banking sector consolidation by Ernst & Young (E&Y) estimates that the banking sector in the country would require several more branches and employees to increase penetration by 2018.
The country requires an additional 11,600 branches and 142,000 employees by 2013 and an additional 20,300 branches and 250,000 employees by 2018 in order to achieve penetration level of 74% and 81.5% in 2013 and 2018 respectively, E&Y said in the report, which was released during a conclave on ?Indian Banking Vision 2010? in Mumbai.
Moreover, given that a major chunk of the workforce of the public sector banks is set to retire by 2018, banks should make efforts to re-skill and re-deploy their workforce to increase their productivity.
However, according to the report, there are some significant issues that need to be addressed to realize the benefits of bank consolidation for the economy as a whole.
First and foremost, some of the legal hurdles need to be removed to make public sector banks (PSBs), which still control about 68% of the banking sector, an active participant in the consolidation process. Especially, consolidation among PSBs could help realize true benefits of consolidation. These hurdles include bringing down the government ownership from mandatory 51% and amending certain clauses in Acts governing these banks to facilitate their merger. Secondly, on the co-operative banking side, issues of dual control should be resolved for a smooth merger of these credit institutions.
Although the banking industry in India has witnessed many mergers and amalgamations triggered by combination of government diktat and synergetic motives, the benefit of size earned in terms of assets and reach is rarely significant to be called ?consolidation?, observed the report. A high level of fragmentation among Indian banks, as compared to some of the advanced economies of the world, still exists posing a severe threat to their profitability and viability of conducting business. Fragmentation is particularly high in the co-operative sector, where over 100,000 entities share just 4% of the total banking assets in the economy. The government should aggressively take steps to bring about large-scale consolidation within this sector by eliminating certain regulatory impediments to create a conducive environment, suggested the report.
Thus, by preserving their rural reach and local feel, the government can promote its big-ticket agenda of financial inclusion.