A Layman's View on PSU Consolidation
Consolidation of
Public Sector Banks – Will it serve any purpose?
Yes, definitely. The suggestion of consolidation among PSBs has quite
old history. Narasimham Committee Report in 1991 (NC-I), recommended a three
tier banking structure in India through establishment of three large banks with
international presence, eight to ten national banks and a large number of
regional and local banks. Narasimham Committee Report in 1998 (NC-II) also
reiterated the recommendations on NC-I.
Few
strong arguments for Consolidation can be given below:
1. Indian banking sector is highly
fragmented. PSBs mostly competing with each other as they have same
business model, products and segments. Herfindahl-Hirschmann Index (HHI)1 for
Indian banking sector stands at 545.2, reflecting low levels of concentration. It will also enable geographical diversification, increase in
market share and penetration to new markets, and help promote international
acceptance and recognition.
2. Need for huge Capital base to Manage
NPA. Higher capital base post consolidation will
facilitate increased lending activity and faster growth of gross domestic
product.
3. Capacity to meet Large Credit
Demand:
Larger banks should be able to generate
greater economies of scale and scope.
4. Reorganisation may
positively impact corporate governance and managerial efficiency.
In the past
we have seen many successful mergers. The merger of ING Vysya Bank with Kotak
Mahindra Bank helped in creating a large bank with national presence, as ING
Vysya had a stronger presence in South India while Kotak Mahindra Bank had good
presence in the West and North India.
However
consolidation has its fare share of Risk toos: The below two factors must be
analyzed very carefully before merger or there can be huge issues
1.
Human
Factor/Human Resource/Different Culture
2.
Technology
Challenges
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