Since 1991, the Indian economy in general and the banking sector in particular have experienced a number of changes. Till the early 1990s, i.e., in the pre-liberalization era, public sector banks were enjoying a near-monopoly status, catering to the core banking business of borrowing and lending. Moreover, these entities were serving as a captive market for government securities in the wake of higher level of SLR and CRR requirements. However, the post-reform period has witnessed a paradigm shift in the banking sector-entry of new players is allowed now, interest rates are rationalized/deregulated, administered interest rate structure is dismantled, reserve requirements have been progressively brought down, and newer customized products and a host of new services too are introduced by the banks. Consequent to the shift from the sellers' market to the buyers' market, customers have become more aware of the competition and hence their choices and alternatives.
The requirements of Basel II environment are putting immense pressure on the banks to raise their capital. With the implementation of Basel II norms with effect from March 31, 2007, banks will be required to have, on an average, an additional 3% of capital translating into around Rs. 60,000 cr. This pressure of increased capital requirement is expected to trigger a phase of consolidation in the banking industry. Consolidation can happen through different ways-mergers and acquisitions (voluntary as well as market-driven) could be one way to achieve this. It is expected that this process will gain greater momentum in the coming years. Mergers among public sector banks or public sector banks with private sector banks might be the next logical outcome/development to happen as market participants tend to consolidate their position to remain in business. Besides, consolidation could take place through strategic alliances/partnerships. This collaborative approach, as an alternative to merger, will be preferred to reduce transaction costs through outsourcing, leverage synergies in operation and avoid problems related to cultural integration. Further, opening up of the financial sector under WTO would witness a number of global banks taking large stakes and control over banking entities in the country.
It has been observed worldwide that benefits of consolidation are manifold: Cutting costs and increased market share; reaping benefits arising due to economies of scale at larger volumes; lower operation and other overhead costs (establishment, tax compliance, legal, premises, stationery, etc); greater geographical coverage that will mitigate the reverses occurring in a specified area/region; the bigger entity, post-merger, will be able to raise a large amount of capital; increased pool of resources; better delivery systems, etc. In a nutshell, given the advantages as well as inherent compulsions associated with the process of consolidation, it is a matter of time before the banking industry in India will experience a spate of consolidation. |
