Based upon inaugural address by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at ‘BANCON 2010’ in Mumbai on December 3, 2010.

In its 1998 report, the Narasimham (II) Committee envisaged a three-tier structure for the Indian banking sector: 3 or 4 large banks having an international presence on the top, 8-10 mid-sized banks, with a network of branches throughout the country and engaged in universal banking, in the middle, and local banks and regional rural banks operating in smaller regions forming the bottom layer.

However, the Indian banking system has not consolidated in the manner envisioned by the Narasimham (II) Committee. The current structure is that India has 81 scheduled commercial banks of which 26 are public sector banks, are private sector banks and 34 are foreign banks. Even a quick review would reveal that there is no segmentation in the banking structure along the lines of Narasimham II.

A natural sequel to this issue of the envisaged structure of the Indian banking system is the Reserve Bank’s position on bank consolidation. RBI believes that the consolidation process should be market-driven, based on profitability considerations and brought about through a process of mergers & amalgamations (M&As). The initiative for this has to come from the boards of the banks concerned which have to make a decision based on a judgement of the synergies involved in the business models and the compatibility of the business cultures. The Reserve Bank’s role in the reorganisation of the banking system will normally be only that of a facilitator.

It should be noted though that bank consolidation through mergers is not always a totally benign option. On the positive side are a higher exposure threshold, international acceptance and recognition, improved risk management and improvement in financials due to economies of scale and scope. This can be achieved both through organic and inorganic growth. On the negative side, experience shows that consolidation would fail if there are no synergies in the business models and there is no compatibility in the business cultures and technology platforms of the merging banks.

There are two specific questions: (i) can Indian banks aspire to global size?; and (ii) should Indian banks aspire to global size?

On the first question, as per the current global league tables based on the size of assets, our largest bank, the State Bank of India (SBI), together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145 and Bank of Baroda at No.188. It is, therefore, unlikely that any of our banks will jump into the top ten of the global league even after reasonable consolidation.

Then comes the next question of whether Indian banks should become global. Opinion on this is divided. Those who argue that we must go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong enough global presence. The main argument is that the increasing global size and influence of Indian corporates warrant a corresponding increase in the global footprint of Indian banks. The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring to global size.

It is possible to take a middle path and argue that looking outwards towards increased global presence and looking inwards towards deeper financial penetration are not mutually exclusive; it should be possible to aim for both.

With the onset of the global financial crisis, there has definitely been a pause to the rapid expansion overseas of our banks. Nevertheless, notwithstanding the risks involved, it will be opportune for some of our larger banks to be looking out for opportunities for consolidation both organically and inorganically. They should look out more actively in regions which hold out a promise of attractive acquisitions.

The surmise, therefore, is that Indian banks should increase their global footprint opportunistically even if they do not get to the top of the league table.

 

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