Banking industry should be consolidated to empower larger banks

In Bangalore banking conference was organized by Mint where discussion on consolidation of banks, competition and inclusion was taken up by the chairmen and CEOs of several banks.

During the discussion the Reserve Bank of India (RBI) deputy governor V. Leeladhar said that he is in favor of consolidation of the banking industry so that larger banks get more power to fight competition and expand its reach to the unbanked areas. He added that all through this process the regional and cooperative banks should also be taken along as they play a crucial and at times have a distinct hand in financial inclusion.

He added, “If we think that commercial banks will be able to...(practise) financial inclusion in a cost effective manner in rural areas, we are 100% mistaken”. He further added, “It is left to the rural and urban cooperative banks and many other arms of the financial system to achieve the obligations of financial inclusion”.

He informed that RBI on its part has been constantly encouraging urban and rural cooperative banks to become strong and self-sufficient. This year RBI is giving licenses to cooperative banks to open new branches to expand their network across the country.

Leeladhar informed the gathering of chairmen and CEOs of several banks, “We have permitted them to have ATMs (automated teller machines), which is a big development. We have permitted them to have currency chests, which were never permitted”. A currency chest is a vault or safe that belongs to RBI but is kept on the premises of a bank and managed by it on behalf of RBI.

He point out, “We have convinced the state governments to initiate audit of the banks, with deposits of more than Rs25 crore, by professional independent chartered accountants as against the earlier system of audit by people who had no prior experience in auditing”.

He further added that commercial banks should expand and consolidate to enter the global markets. He said, “I still feel, as I used to advocate when I was chairman of Union Bank, that we do not require such large number of small commercial banks…we require small numbers of large banks.”

Comparing the situation with Malaysia where the number of banks has come down to eight to nine large banks after consolidation from 38 earlier, Leeladhar told the gathering that even in India after the consolidation there could be healthy competition among large banks. After consolidation large banks will have more influence in the international arena due to the size of their balance sheets, which is not possible in a current scenario with fragmented banking industry otherwise, he added.

“I have seen hundreds of applications by our commercial banks rejected by other countries saying, ‘What is the size of your bank? Why do we require such small banks to open branches in our country?’ There are many cases like this where applications have been rejected only because we look like pygmies in that whole system,” he said.

However the deputy governor of India’s banking regulator, made it clear that consolidation of banks should not be done at the cost of inclusion which is the main agenda of both the central bank and the government. In fact, he said regional and urban cooperative banks can reach out to the masses more easily with the responsibility of financial inclusion.

Leeladhar suggested that commercial banks to attain wholesome financial inclusion should help in strengthening the system of regional rural banks (RRB) and other cooperative bodies. “Look at RRBs of Canara Bank, look at RRBs of Syndicate Bank…how well they are functioning! At the same time, look at RRBs of Uco Bank or United Bank, you will see they are incurring huge losses,” Leeladhar said. “Which only goes on to show that in this concept, bank supervision counts,” he added.

“Some RRBs have far superior customer service than the sponsor bank or other commercial banks, private and public, that we are so proud of. I have observed that they have a genuine concern for their customers. Which only shows that they can independently handle financial inclusion in an effective manner,” Leeladhar said.