In News:

• The Reserve Bank of India (RBI) has raised concerns about bank consolidation, stating that it increases the market power of merged institutions and adversely affects financial inclusion.
  
  

What’s in today’s article:

• About Bank Consolidation (Meaning, Advantages, Disadvantages, etc.)
  
  
• News Summary (RBI on bank consolidation)
  
  

What is Bank Consolidation?

• Bank consolidation is the process by which one banking company takes over or merges with another.
  
  
• This convergence leads to a potential expansion for the consolidating banking institution.
  
  

Who Recommended Bank Consolidation in India?

• M Narasimham, the 13^th Governor of RBI, in his report, known as Narasimham Committee Report, in 1991 first recommended a three-tier banking structure in India:
  • Three or four large banks (including State Bank of India) could become international in character.
    
    
  • Eight to ten national banks with a network of branches throughout the country, engaged in Universal banking.
    
    
  • Local banks should concentrate on region specific banking.
    • For example, Regional Rural Banks (RRBs) should focus on agriculture and rural financing.
      
      
    
    
    
  
  
  

Potential Advantages of Bank Consolidation:

• Become Globally Competitive:
  • As the banking system goes to following global guidelines of Basel III Norms, such mergers will enable banks to be able to face competition.
    
    
  • As of now, no Indian bank counts in the list of G-SIBs (Globally Systemically Important Banks).
    
    
  • Consolidation of banks will consequently form a few strong banks to form a pillar of the economy.
    
    
  
  
  
• Addressing the challenge of Non-Performing Assets (NPAs):
  • With increasing stress in the banking sector from NPAs, small banks and NBFCs are not in the potential to lend more loans.
    
    
  • Post-merger, big banks can better deal with non-performing assets and may not have to stop giving more loans.
    
    
  
  
  
• Improved Efficiency:
  • With multiple banks opening in some regions, there is some inefficiency in the economy in terms of the duplicity of work and physical capital.
    
    
  • It can be combated with mergers, thereby, creating economies of scale in operations.
    
    
  
  
  
• Boosts Investor Confidence:
  • In terms of investment flows, investor confidence for strong banks is likely to be higher than that of weak ones.
    
    
  • The paucity of investments is a current issue faced by medium and weak banks.
    
    
  • Strong banks have the bandwidth to attract investments.
    
    
  
  
  

Potential Disadvantages of Consolidation:

• HR related issues:
  • Smooth integration of operations always poses a risk, especially with the prospect of resistance from staff and unions in the entities being merged.
    
    
  • There are issues like cultural fit, redeployment of staff, and fewer career opportunities for many in a merged entity.
    
    
  
  
  
• Fewer options for customers:
  • It could also reflect in fewer options for customers; an easing of the personal touch which many of the midsize and smaller banks have.
    
    
  • Another concern could be deterioration of services and disruption in the near term as the merger process gets under way.
    
    
  
  
  
• Too big to fail:
  • Yet another worry is the possible creation of what is known as systematically important institutions, or those too big to fail, leading to the prospect of bailouts in the future, which could hurt the government and financial stability.
    
    
  
  
  
• The swelling of combined bad loans with some of these mergers is also an issue.
  
  

Can Consolidation alone make a difference to the state of Indian banks?

• Governance of these banks has been an major issue, which has dragged down many.
  
  
• Former RBI Governor Y V Reddy, in his D T Lakdawala memorial lecture, had said that the idea of consolidation of banks will solve the problem of public sector banks is not correct.
  
  
• According to him, if the problem is structural and of governance, it does not matter whether the banks are large or small.
  
  

News Summary:

• Recently, the Reserve Bank of India (RBI) released a report titled ‘Currency and Finance’ (RCF) for the year 2021-22.
  
  
• In the report, the RBI has raised concerns about bank consolidation, stating that it increases the market power of merged institutions and adversely affects financial inclusion.
  
  

What did the report say?

• According to the report, consolidation could result in less competition by giving fewer choices to the customer and may also result in the non-competitive pricing of products.
  
  
• Mergers helped strengthen the capital buffers of banks, but it is difficult to isolate the impact of mergers from other forces acting concomitantly.
  
  
• Referring to the mega consolidation among public sector banks (PSBs) where 10 merged into four, the RBI said that factors like government ownership, similar pay structure for staff and common core banking solutions made the merger process simpler.
  • In April 2020, 10 Public Sector Banks were amalgamated into 4 banks.
    
    
  
  
  
• Noting that the government has infused in Rs 2.9 lakh crore in the last five years into public sector banks, the RBI said this has helped the PSBs improve their capital adequacy ratio to 14.3% in December 2021 from 11.8% in March 2016.
  
  
• However, the RBI has cautioned that the capital infusion should not become a substitute for better governance and risk controls.