Is it better for India to have bigger but fewer banks?

There are reports that India is going to participate in a new cycle of consolidation in the banking public. Governor of the Reserve Bank of India, Urjit Patel, recently pointed out at Columbia University that it is better for the country to have fewer, healthier banks.

While the government intends to consolidate public sector banks, NITI Aayog, a policy think tank advising the Indian government had worked to formulate a road map and report before the first week of July.

In theory, the main reasons for these mergers are economies of scale and scope, increased revenue, maximize value, greater efficiency, cost savings, customer and asset diversification, and also that large banks contribute to international recognition. However, fusions, in general, are a challenge and must be carefully designed. They can succeed in similar institutions with similar culture but can not be widely adopted, as it could lead to job cuts, closure of branches and, in some cases, a reduction in the quality and quantity of services. The simple consolidation of weak banks does not produce a healthier institution. In fact, it can cause significant damage to the economy.

The crisis in Southeast Asia in 1997 has encouraged the consolidation and restructuring of banks in many Asian countries. In the US, there has been a consolidation of the banks since 1916.

Restructuring of Indian banks through mergers and acquisitions has been recommended by several commissions since 1972. To illustrate, the new Bank of India and the National Bank of Punjab merged the two PSBs in 1993. In 1998, M Narasimham headlined in the banking sector reforms also recommends PSB merger. Therefore, many banks have merged – for example, Saurashtra State Bank and Indore State Bank with a State Bank of India in 2008 and 2010, respectively.

In this context, the recent consolidation of the SBI and all its sister concerns should be considered as a continuation of the same process. The newly merged new OSE now has a base of 370 million customers, a network of nearly 24,000 bank branches and 60,000 ATMs. He was catapulted to the top 50 banks in the world in terms of assets.

It is necessary that while OSE, the largest lender in India, is competing with the best banks in the world in terms of size, and the network of business offices, faces competition within the country. On the other hand, consolidation is not only about size, but also efficiency and synergy, since economies of scale make the bank more productive, profitable and competitive. There is evidence that large PSBs are more efficient and work better than BSPs. Therefore, the need for consolidation.

If the consolidation of banks continued to strengthen PSB and solve the problem of increased delinquency and ongoing recapitalization needs, other alternatives such as privatization of PSB loss and cost benefits should also be explored. Many countries, including the former bloc countries, have privatized their nationalized banks.

This implies that the social control policy of 60 years in India should be reviewed. As the Planning Commission was a remnant of the socialist era, it is the same social bank. Is it the time to see if the PSB are really necessary to serve social banking in our country and, if so, at what price. Privatizing some PSB deficit will ensure that market discipline forces them to rectify their strategy, which will have a domino effect on other PSBs.