Bank Consolidation: An Idea That Is Long Overdue - Moneylife

Bank Consolidation: An Idea That Is Long Overdue - Moneylife

My online comments:

A timely recall of Narasimham Committee recommendations. As an additional input for taking the debate forward, copied below excerpts from my article on the subject published in The Global ANALYST, March 2016:

"Wholesale restructuring and revamp

The need for restructuring and revamp of the banking system was recognised within a decade of nationalisation of major private sector banks. In 1991, the Committee on Financial System (Narasimham Committee) visualised a structure for Indian Banking System with “three or four large banks that could become international in character; eight to ten banks with a network of branches throughout the country engaged in ‘universal banking’; local banks whose operations will be generally confined to a specific region and rural banks (including Regional Rural Banks) whose operations will be confined to the rural areasand whose business would be predominantly engaged in financing of agriculture and allied activities”.

There is no point in arguing now that the overhaul and professionalization of public sector banks (PSBs) should have happened along with bank nationalisation and there should have been regular ‘health checks’ and ongoing corrections. Just as a ‘health check up’ does not change the condition of a person, the re-classification of more loans as NPAs does not alter a bank’s ability to change. The need of the hour is to support banks to recover their dues from borrowers who have the capacity to repay, infuse professionalism in the banks’ working and restore the faith in the banking system. As private sector banks have failed to perform their responsibilities and are not too willing to grow (their share in banking business is less than 30 per cent), privatising the existing public sector banks is no solution. The failure of Global Trust Bank and merger of several private sector banks with PSBs during the four decades that followed bank nationalisation are fresh in our memory.

Considering the emergence of new banks in the private sector like small banks and payment banks and the likely event of new bank licensing becoming an on-tap affair- in the context of the long gap between the last bank licence issued and the issue of a couple of new bank licences last year, RBI is working on procedures and processes necessary to make this happen- restructuring the banking system cannot wait any further. In this context, revisiting the Narasimham Committee recommendations referred to above and evolving a national policy for mergers and closures as also opening of new banks/branches become relevant. At present same categories of banks compete among them in the same pockets for business. The extent of competition necessary for efficient functioning of the system is a matter of policy perception.

The background for bank nationalisation was that the banking sector which is dependent on public deposits and should remain subservient to ‘public interest’. Perhaps, GOI should also consider nationalising private sector banks which are shying away from social banking and are averse to penetrating to rural areas. Allowing some private sector banks to pick and choose clientele can create imbalances in resources mobilisation, outreach and business profiles of banks. The lament by certain quarters about taxpayers’ money being used to ‘bail out’ PSBs need to be discounted to some extent considering the fact that pay-out to government from banks by way of dividend and taxes more than compensate for the outgo on account of capital infusion."

M G Warrier


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