Bank Consolidation

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.

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.

Background –

• M Narasimham, the 13th 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.