New Delhi: The Reserve Bank of India in its April review next year of the banking sector is expected to announce reforms pertaining to foreign banks in the country. If amendments like larger voting rights by foreign shareholders and a faster rate of expansion for foreign banks are allowed smaller Indian banks may become easy prey for large international ones. Consolidation of smaller banks or their merger with larger banks seem in the offing.
But will consolidation help the Indian banking sector?
”I think the time is absolutely right. I think we are delayed if you ask me. We should be consolidating within the Indian banking system in any case. Too many banks, each one small, under capitalized, small market caps, small balance sheets. It’s got to be a game where in the long run we are going to have larger banks with larger market cap. You have got to pick up the pace,” says Sanjay Nayar, the CEO of Citigroup India.
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According to a report on Currency and Finance by the Reserve Bank of India in September this year, the combined assets of the five largest Indian banks - State Bank of India, ICICI Bank, Punjab National Bank, Canara Bank and Bank of Baroda total half the asset size of the largest Chinese bank - Bank of China that has assets worth $962 billion. RBI says if the banking sector has to be assessed in the international context, size is the most important factor.
But there are dissenting voices. KC Chakrabarty, the chairman and managing director of Punjab National Bank, says ”In my view the time for consolidation happens in an industry where there is a proliferation of products and services. We are talking consolidation in an industry where 60% population doesn’t have access to the banking service. So in my view financial inclusion is more important that consolidation. Let us first provide the basic banking services to people then talk consolidation.”
Public sector banks have until March 2009 to comply with the Basel II regulations that require a higher capital adequacy ratio which small banks may find hard to achieve. Some are already taking their cue. The Centurion Bank of Punjab’s merger with HDFC worth $2.4 billion was the largest merger in India ever.
Says Gunit Chadha, Managing Director and Chief Executive Officer, Deutsche Bank, ”I think there is a long way to go. If you see what is happening globally but that’s more out of necessity than choice - banks are consolidating in India will unleash huge cost synergies, which can actually benefit banks and consumers. So I think what we are seeing today are very early days of consolidation.”