Tuesday, April 27, 2010

Inculcating a Sense of Banking Consolidation

At global arena, last few years would be recalled for all troublesome reasons in banking sector…havocking recession and later relentless banking failures, bailouts, grim faces of western regulators were suffice to epitomize the gravity of situation which on most of occasion appeared as out of hand. In India too, financial sector at large faced the ire of world-wide recession although the scale was much lower in comparison of western counterparts owing to differences of regulatory norms and variation of disastrous greed.
Obviously cutting edge of Indian financial sector in the wake and after recession allowed it to practice on its own propositions unlike western economies and U.S.A particularly where the focus is now shifting again towards the days of Glass-Steagall Act that originated to contain the financial crisis, immediately after the depression-I in 1933.

Regardless of its intrinsic values, this act diluted over a long period starting in the 1980’s and eventually withdrawn through the Gramm-Leach-Billey Act or Financial Services Modernization Act in 1999, that grossly paved the way for financial innovation and proliferation. Here, policymakers need to check the weak spots in the system and install checks and balances to strengthen them, and avoid any systematic failure;for Indian regulators, it would be equally imperative to make advance efforts on banking and financial reform with keeping in mind the ground realities.
In Indian context, banking consolidation is the most pertinent case en route to financial sector reform which can lead Indian economy to a new trajectory of growth;banking consolidation makes strong sense here but it must be also accompanied by banking sector reform.The process for amalgamation of Public Sector Banks {PSBs}is directed by The Banking Companies {Acquisition and Transfer Understanding} Act,1970-according to the act, the central government may after consultation with the RBI can formulate a scheme to carry out the process of amalgamation of PSBs.

Even now, the country ‘s largest bank, State Bank of India {SBI}accounts for 30% of total banking stake and no other public sector bank is poising any competition with it, as Punjab National Bank merely sharing the 6% footprints of total Indian banking business. So, apprehensions of western regulators that “too big bank may vulnerable to fail” is hardly rational from India’s point of view as even after considerable restructuring of PSBs, they will remain much smaller than major western banks.
In the past half a century, in most rich countries, the financial sector has become too much large for the real economy-in recent survey of the magazine Economist, it was found that, relative to the size of the economy, banks in the UK are 10 times bigger now than they were four decades back-more or less, this is also the reality of U.S.A but Indian banking pitched distinctly, so they now have reason to knock the opportunities in different manner.With considering on factors such as cultural synergies, geographical presence, profitability and market share-three sorts of merger policy would be pragmatic-I. Merger of Associates banks with the SBI, II. Expansion in Regional Rural Banks merger at further state and later swiftly at national level and III. Voluntary mergers among the nationalized banks, where they must be given choice and feasibility to decide.

Government and regulators must play an enabling role by distressing the fear of proposed maneuverings by ensuring all good materialization for employees and clients through its expanded resources. Two appointment {of consultants} have made in this regards by the Finance Ministry-both of them, Mckinsey&Co and Ernst&Young are foreseeing economies of scale as big factor for PSBs to move in the direction of consolidation, a basic assumption of 7-8% market share by the merger of two banks are foremost in their recommendations but its enactment would depend lot on the measures of regulators and their intertwining with deeper nuances of potential change.
RRBs deserve token appreciation for their daring initiatives of consolidation which left all happy changes in their business and outward reach, which was a long due for them to diversify aggressively. Government and regulators in proper consultations with the all PSBs should find a consensus decision to lead Indian banking to the next level by essentially approaching on the issues of human resource development and more professionalism to mark the differences.
Atul Kumar Thakur
April 25th 2010, Sunday, New Delhi

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