Page 49 - Banking Finance June 2019

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as well as cyber security measures need huge investments Smaller banks should not be competing in sectors where they
which may not be feasible for smaller banks. But bigger do not have the capacity to fund long term .They should focus
entities can easily absorb this cost. on niche lending. They could focus on retail lending instead
of competing for corporate loans with bigger banks.
From a customer's perspective, "Banking is necessary, but Differentiated banking approach should form the crux of
banks are not (Bill Gates)" but from a bank's perspective consolidation of banking sector. RBI in April, 2017 had
customers are not only necessary but essential for existence. released a discussion paper on the Wholesale and Long Term
A customer can easily choose from various options like PSB, Finance (WLTF) banking.
Pvt Sector Banks, Foreign Banks, Fintech Co, Payment Bank,
Small Finance Bank etc. Hence, consolidation becomes It is an opportunate time to bring this concept to action.
imperative for PSB's to scale efficiency ratios and becomes WLTF banks would focus on infrastructure lending and
the first choice for customers. medium and corporate businesses. With IL&FS in deep
trouble, the time is ripe for long term finance banking to
Perhaps, it is the appropriate time to fix the right side of acquire the centre stage. But before that, there is a need
balance sheet in a much more calibrated way than the left to investigate the reasons for mess in IL&FS and put in place
side. There has to be an emphatic focus on assets side. The a proper mechanism in WLTF banks to avoid recurrence of
PSB's road to recovery hinges on individual bank's the same.
performance and with stockpiling of bad debts, it is a good
idea particularly for smaller banks to consolidate. This would To sum it up, it can be said that the long-term gains of
enable them to have a better say in negotiations with big consolidation far outweigh short-term pains. A consolidated
defaulters. Indian banking system is definitely a positive development
for moving forward. But then it needs to be coupled with
Conclusion higher capital requirements and governance reforms
alongwith more transparency, accountability and
Consolidation helps in scaling up quickly and getting new
compliance. CONSOLIDATION IS NOT A raison d'être in itself,
customers instantly with a broader geographic footprint. It
it should be beneficial and convenient for customers and
also addresses capital adequacy concerns. It has a lower
investors as well.
aggregated risk profile as large number of similar risk
complementary loans decrease overall institutional risk.
References:
However, consolidation under distress or in repair mode
1. HHI is a commonly accepted measure of market
should be avoided. Banks need to have sustainable business
concentration. It is calculated by squaring the market share
models for evolution as well as disruption. Its effectiveness
of each firm competing in a market and then summing the
would be hampered if after consolidation the merged entity
resulting numbers. It can range from 0 to 10,000. Higher
continues with same business model and all PSB's retain
HHI means that the number of firms is decreasing, i.e there
their universal bank status.
is consolidation in market
Under BASEL III framework, GSIB's have to maintain TLAC
(Total Loss Absorbing Capacity) of at least 16% of resolution
group's Risk Weighted Assets from 1st Jan 19 and at least
18% from 1st Jan 22.
1. https://www.wsj.com/articles/biggest-three-banks-
gobble-up-2-4-trillion-in-new-deposits-since-crisis-
1521711001
2. The Economic Growth act also includes an amendment
to raise the asset threshold for bank holding companies to
$250 billion from the current $50 billion for automatic
treatment as systemically important financial institution
under Dodd Frank Act.

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