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Economic Highlights
New Delhi, 27 January 2007
Creating Mega Banks
FINANCE SECTOR
NEEDS FASTER PACE
By Dr. Vinod Mehta
The Government is again reported to be mulling over the idea
of encouraging Public Sector Banks to take initiative to merge so as to emerge
as mega banks of international standard. The Government has been pursuing this
idea for the last few years but because of strong opposition from a few
political parties and trade unions it has hesitated to move forward.
Globalization demands that we should have six to seven strong mega Indian banks
which can not only withstand competition from mega international banks but also
play a significant role in the international financial markets.
In fact, the Narasimham Committee in its second report on
banking sector reforms about a decade ago had set the tone for the creation of
mega banks by suggesting many sweeping changes in the banking sector with a
view to bringing them on par with the international banks. It must however be noted that these
recommendations had been made even when the recommendations of the first
Committee on bank reforms, which was also chaired by him, had not been fully
implemented because of the intense opposition from the employees' union.
The Committee covered all the important aspects ranging from
bank mergers to the creation of global-sized banks. While making these
recommendations, the Committee had kept in view the inevitable capital account
convertibility, which is likely to result in large inflows and outflows with
the attendant implications for exchange rate management and domestic liquidity
which only very large banks are capable of handling.
Some of its important recommendations are: 1) merger of
strong banks only with some of them being accorded an international character;
the Committee opposed the merger of strong and weak banks as such a merger
would pull down the stronger bank. 2) Concept of narrow banking could be
arrived at to rehabilitate weak banks. 3) Small, local banks to be confined to
states or cluster of districts in order to serve local trade, small industry
and agriculture; such banks will have very low overheads allowing for lower
costs of services.
4) Functions of Boards and Managements to be reviewed so
that the Boards remain responsible for enhancing shareholder value through
formulation of corporate strategy. 5)
The minimum prescription for capital adequacy norms to be revised
upwards as the banks will now exposed to more of balance sheet risks. 6) To
speed up computerization of banks and focussing
on relationship banking. 7) Review of recruitment procedures, training and
regeneration policies in public sector banks.
It has been stated in this column on several occasions that
the finance sector, which was to be reformed at a much faster pace is the one
which is still lagging behind. None of
the present Indian banks is able to stand internationally or to ward of the
threat of take-over by foreign banks on their own. They are surviving because of the Government
backing. All over the world the strong
banks have joined hands or are joining hands to become mega banks so that they
can stand the international competition and manage the flow of funds in a
better way.
People would recall that a decade ago two Japanese banks, namely Bank of Tokyo
(which had more international presence) and Mitsubishi Bank (which had more
national presence) to become Bank of Tokyo-Mitsubishi; at that time Bank of
Tokyo-Mitsubishi with the assets
totaling around US $647.781 billion is the largest bank in the world. The second largest bank in the world in terms
of assets is Deutsche Bank followed
by Credit Auricle, Sumitomo Bank, Industrial and Commercial Bank of China. If India's
largest bank namely State Bank of India joins hands with its seven associate banks even then it would rank 129th
bank in the world in terms of assets.
Again if one were to merge Bank of India, Corporation Bank
and Oriental Bank of Commerce, the merged entity would perhaps rank 331st
in the world in terms of assets. All this is to say that we do not have a
single bank of international dimension.
It will take perhaps 8 to 10 years from now for a few Indian strong
banks to emerge a bank of international dimension provided some of them are
merged now.
It is in this context that we have to see the recommendation
of the Narasimham Committee. It was against forced mergers between strong and
weak banks as it feared the weak bank will pull down the stronger bank as was
seen in the merger of New Bank of India with the Punjab National Bank
more than a decade ago. Politically, it
may be difficult for the Government to close down the loss
making banks but Government will have to take stern measures in this direction.
Either the loss making banks accept
the rehabilitation package worked out by the Government or else accept their
closure. The Government cannot afford to
save them all the time by diverting tax-payers money; had they been in the
private sector they would have closed down by now.
One of the reasons for the rut in the banking sector is the
equalization of pay-scales of various levels of bank employees in the
nationalized banking sector. Such an
approach does not make any distinction between efficient and inefficient
employee. Therefore, it hardly matters
whether the bank is earning profit or making losses
since the employees are ensured of their pay in the regular scale. After the
submission of the second report the
bank employees have again threatened that they will resort to nationwide strikes
if any attempt is made by the Government to close down loss
making branches of a bank or loss
making banks themselves.
It may be observed that the bank employees are using their
monopoly power to hold the nation to ransom by refusing to cooperate with the
Government in the implementation of financial sector reforms even when the
Government has ensured that none of the existing employee will be forcibly
retired. If still the employees adopt a
stubborn attitude and do not cooperate in the implementation of reforms, the
Government should take very strong stand and take action against the employees
within the legal framework available to it.
The change in the functioning of banks as well as
restructuring is inevitable because of the sweeping technological changes in
the banking industry all over the world.
With the advances in information technology, computer technology etc.
the concept of bank branch has become totally irrelevant. Again with the costs of real estate going up
everyday maintenance of separate bank branches is eating into the potential
profits of the banks. All over the World
Bank branches are giving way to ATMs and personal computers for carrying out a
number of banking transactions. Then
there are big financial deals to be arranged and so on. All these are reasons enough for creation of
mega banks.
Some to the private sector banks which came up after 1991
have merged like the Centurian Bank and the Bank of Punjab. But it was a merger
of two relatively smaller private banks. We are talking of merger of strong
public sector banks to create mega banks. With the economy being sucked into
the vortex of globalization many mega international banks are looking for
acquisitions in India but before that happens we must facilitate merger of
strong public sector banks to enable them to become strong mega banks which can
stand up to international banks.---INFA
(Copyright,
India News and Feature Alliance)
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