The takeover of the crisis-ridden Bank of Rajasthan by ICICI Bank is yet another addition to the growing number of mergers between private sector banks and marks their growing ascendancy in the financial sector. This is a welcome change as more than half of the 50 bank takeovers in the post-nationalisation period were accounted for by the merger of weak private sector banks with government-owned banks. Mergers between private banks were few and far between?there have been less than a dozen cases until now. While the merger of two healthy banks to build a substantially larger consolidated entity driven by business considerations would have been the best possible option, the bailing out of a weak bank by a stronger one can also be counted as a positive change. But hard work is needed to ensure that that the gains are fully captured through the efficient integration of the two merged entities. This has usually been a challenging task in the Indian scenario where the banks are very heterogeneous, depending on their ownership pattern and the period of origin. Infrastructure and business process and delivery mechanisms differ substantially between public and private sector banks and between old and new private sector banks. Thus, integration may often become much costlier than anticipated. However, a big gain from consolidation is that it helps achieve economies of scale and augments the capital base that aids banks in funding larger projects than they could have as single, stand-alone entities. And the gains from a larger capital base also extend to other areas like the leveraging of information technology and communication networks.
The lacunae due to the slow pace of consolidation in the Indian banking sector have been keenly felt in more recent times when large Indian corporate groups had to go to foreign banks to mobilise resources for expansion in the international markets. At the moment, India has only one very large bank, SBI, which has a market share that is more than five times the second largest public sector bank. That needs to change. However, the process of consolidation should not be enforced by the government but left to individual bank boards. The government should focus on improving competition in the banking sector by adopting a more liberal licensing policy, including for foreign banks, and taking concurrent steps that will promote inclusive banking on a much larger scale.