Do we need more banks or bigger banks?

Saikat Das
moneycontrol.com

The Reserve Bank of India on Friday fueled enough optimism for India Inc, mostly bruised with economic blues. They can now apply for a new banking licence. The central bank released guidelines for the same. Corporate CEOs were vying each other in airing their voices to stake claim as potential candidates. According to reports, RBI may issue 4-5 such licences.

Is it the need of the hour?

India, the second largest populated country, has total 77 banks including 27 public sector banks, 20 private banks and 30 foreign banks. However, this huge universe has not clinched any significant global footprint.

Country's largest lender - the State Bank of India (SBI) ranks 60th globally in 2012 in terms of tier I capital (equity + reserves). The second largest bank (in terms of loan book) ICICI Bank 's position is way below at 110. Among top 200, four more banks including HDFC Bank , Bank of Baroda , Canara Bank and Punjab National Bank managed to find their ranks.

Financial inclusion or basic banking service for every Indian seems to be the motivating factor for expanding banking reach. According to experts, consolidation should be the ideal solution to it, not new banks.

"There is no substitute for consolidation in PSU banks," Ramnath Pradeep, former chairman of Corporation Bank and currently chief advisor at PDS & Associates, a Mumbai based law firm; told moneycontrol.com.

"Indian companies are spreading their tentacles by acquiring companies abroad. For funding cross-country acquisitions Indian banks should acquire size and sophistication. State Bank of India is considered to be small fry in the global banking arena. Despite cornering about 25 per cent of the banking business in the country, SBI does not rank in the top 20 global banks. Ideally, India should have 4 or 5 global-scale banks," he said.

SBI & associate banks

SBI has five associate banks including State Bank of Hyderabad (SBH), State Bank of Patiala, State Bank of Mysore (SBM), State Bank of Travancore (SBT) and State Bank of Bikaner and Jaipur (SBBJ). Earlier, SBI had merged the State Bank of Saurashtra with itself in 2008 while the State Bank of Indore was merged in 2010.

Since then, no further merge has taken place so far. Once all its subsidiaries are merged with it, it would be among the top 10 banks in the world in terms of various parameters.

Also read: RBI issues guidelines for new banking licence

"Consolidation is more important than having more banks," said Laxman Kumar Nasarpuri, Partner, Financial Pundits a financial advisory firm.

"In the past, many new banks had come up. For the sake of competition and in an effort to get a foothold in the banking industry quickly, these banks, at times, deviated from the conventional banking policies & practices in lending, deposits and treasury functions but with very little long term positive impact on their performance and in some cases, these banks were taken over and merged with larger banks. It culminated in increase of non-performing assets also," he said.

Smaller PSU banks of no use?

Even today, according to Nasapuri, some small public sector banks (viz. Dena Bank, Andhra Bank, United Bank of India and others) have not been able to show a healthy performance. They are even hesitant to act as a lead bank and are content with being a consortium member . The need of the hour is merger of small banks to emerge into large entity (ies).

"If the mergers can address this issue and give some relief to the government, it would be an added advantage, besides ensuring other synergies in scale of business, even geographical spread (branch concentration) and lower NPAs of the merged entity," Pradeep said.

Some market considerations for possible mergers

Allahabad Bank, Central Bank, Corporation Bank and P&S Bank - projected to be the fourth largest

Canara Bank, Indian Bank, BoM, IOB and United Bank of India - projected be the second largest bank

SBI, BoI and BoB - projected to be among the largest banks in the world