It is being increasingly recognised that in a competitive and growing economy such as ours, the development of a strong and robust financial system is critical to realise our developmental priorities and meet the challenges of global competition on domestic turf. It is in this context that a move towards a competitive, profitable and healthy financial sector, made possible through consolidation of existing banks, assumes critical importance.
Indeed, the adoption of global best practices, brought about by consolidation, is likely to confer efficiency gains which would help banks meet the compulsions of the emerging global architecture. At a time when Basel-II norms are sought to be implemented by 2009, wherein banks would be required to meet stringent capital adequacy norms and maintain international accounting and disclosure standards, the strengthening of alliances between banks would help them take on international players on equal terms.
The major advantage accruing from consolidation would be to increase the size of banking operations thereby providing banks with the requisite financial strength to take on global competition. Besides, the large-scale banking operations associated with consolidation would result in a reduction in the average transaction cost. Indeed, by sharing costs between two business units, the total cost of offering services to corporate and individual clients should be lower than that before a merger, thereby increasing competitiveness in the banking sector and, in the process, enhancing growth in the real sector of the economy.
Moreover, the process enables banks to diversify their loan portfolios and harness core competencies to meet the onslaught of competition. No wonder, opinion is building in favour of reform whereby banks are provided the functional autonomy to decide on M&As and leverage economies of scale and scope for mutual advantage. This would ultimately result in scaling down, through amalgamation, the number of commercial banks from around 27 at present to six or seven in future.
A number of commercial banks in the country have already embarked on M&As and suitably modified their prudential norms, accounting and disclosure standards, as well as risk management practices to cater to global requirements, making them resilient to global shocks. Besides, banks are also entering into the field of universal banking, which offers customers a one-stop shop for not only traditional deposit and lending services but also for mutual funds, insurance, brokerage and underwriting services as a strategic response to heightened international competition.
However, despite this, the consolidation and convergence of banks in India has not kept pace with global trends. Our policy makers still contemplate the efficacy of this approach even as countries such as the United States, Europe and Japan have gone ahead with reorganisation way back in the eighties and the nineties. Not surprisingly, India continues to remain an under-banked country.
Our biggest banks are nowhere near the size of international banks. For example, State Bank of India, the country?s largest bank, is ranked only 84 in the world and ICICI Bank, the next biggest, is ranked 200, globally. Besides, banks in South Korea have seven times more assets than Indian banks.
Besides, total loans as a percentage of GDP in India is 28.6 while for Hong Kong, the figure is 138%, Taiwan 149 % and Singapore 102% of GDP. Clearly, we have to reinvigorate our efforts and affect a major revamp of the system so that we are prepared to meet the challenges when the banking system is thrown open to foreign competition in 2009.
Having said that, it is also true that size by itself is a necessary but by no means sufficient condition for ensuring operational efficiency. Hence, for consolidation to be effective, it is important that it is market-led and driven by synergies between participating banks. Besides, it is also desirable to guard against monopolistic and anti-competitive tendencies which might accrue from consolidation.
The writer is an economist with PHD Chamber of Commerce & Industry. These are her personal views