The proposed merger between HDFC Bank Ltd and Centurion Bank of Punjab Ltd throws light on some larger dilemmas in the Indian banking sector.
The past 10 years have seen repeated calls for banking consolidation from regulators, bankers and consultants. Successive finance ministers have called for the emergence of large banks with a global footprint. These calls have intensified after the Reserve Bank of India announced its intention to consider a more open banking market in 2009. There could be fewer restrictions on foreign banks some 400 days from now and Indian banks may have to join hands to avert the threat.
But the actual goal of consolidation has been elusive, with mergers between Indian banks being few and far between. Why? One reason is the way the government has gone about the job. True to form, the finance ministry has toyed with the idea of forced mergers between various public sector banks.
It was always difficult to believe that mergers by government fiat make business sense. Mergers driven by market forces are a far better alternative. The proposed marriage of HDFC Bank and Centurion Bank of Punjab falls square in this category. India needs more of this variant, rather than those planned in New Delhi.
Market pressures and the will of large institutional investors have driven global banking mergers over the past decades. There is no reason to believe that India will be an exception to the rule. Government-sponsored mergers will deliver size but may make little strategic sense, especially since the politically sensitive issues such as branch closures and workforce cuts will be side stepped.
Markets cannot merge most of India’s biggest banks since they are in the public sector. Bank privatization would first be needed, if profitable consolidation is a public policy goal.
It’s time to ask whether size alone is a competitive strength in banking. Mergers do tend to deliver major benefits—a wider retail reach, lower cost of funds and operational efficiency. But size is not the only parameter that matters in banking. Else, the world would not have struggled to come to terms with the Japanese banking collapse in the 1990s and the current troubles at US banks.
Banks such as ICICI Bank Ltd and HDFC Bank have followed sensible strategies—powering their spectacular success through a combination of organic growth and well-conceived strategic purchases of smaller rivals. That’s the model India needs to follow, rather than those grand plans to merge through ministry command.
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