Page 44 - Banking Finance June 2019

ARTICLE

PUBLIC SECTOR

BANK

CONSOLIDATION:

THE WAY

FORWARD

ABSTRACT
Indian banking sector is going through turbulent times and there is no quick fix solution for this crisis. Banks are already
struggling with negative RoA, mounting NPA, and inadequate risk management. With increased regulatory capital
requirements coupled with pressing need for investment in Information Technology banks are finding it difficult to fit in
a platform economy. With half of the PSB's under PCA, the number of strong PSBs is dwindling. Deposit market share
of PSB under PCA has declined from 25.1% (30th June 16) to 21.9% (31st Mar 18).
Consolidation is being seen as a panacea for ailing PSB's, but it needs to be kept in mind that merger of a weak bank
with a strong bank may drain the resources of the latter making the merged entity a feeble one. Generally, the
consolidations should be market driven for a better synergy. But this is not the case with India where Government is
the majority stakeholder in all public sector banks. In the recent consolidation moves, (be it SBI with its associate banks
or BOB+ Dena Bank +Vijaya Bank) initiative was taken by the Government and the proposal was then passed in the
respective Bank Boards.
Do we really require so many banks doing the same functions competing for the same market segments? Perhaps it is
the right time to launch the differentiated concept - Wholesale and Long Term Finance Banks and Retail Banks in India
targeting different markets.

Introduction: Force Multiplier Effect
About the author
Consolidation makes economic and commercial sense as it
helps PSBs to rationalize domestic geographical spread and
Neelam Jha
scale and scope efficiencies. It also helps in international
Faculty, Central Bank of India,
market as size does matter. Bigger banks have clear cut
Officer's Training College
edge in terms of risk diversification and capacity to finance
Mumbai
large scale projects. The Herfindahl Hirschman Index (1)

44 | 2019 | JUNE | BANKING FINANCE