With recent government announcement
of merging 10 public sector banks into 4 banks in order to foster further
banking reforms, total number of state
run banks have been brought down from 27
(2017) to 12. Government clarified that this process will rationalize the demand
on government finances for capital infusion.
An analysis of the data provided in
the finance ministry’s presentation shows that the larger banks stand to
benefit more in terms of capital adequacy than the smaller lenders, a sharp
departure from the past, wherein the government infused capital in their
balance sheets year after year.
Way back in 2016, through my blog
“Consolidation of Banks- a noval suggestion”
(published in my blogspot www.itstrgulati.blogspot.com
& in my website www.bankingquest.com) which was also published in “Business Standard” dated 09.03.2016 under
the heading “Bifurcating Capital”; I advised
the Expert Committee on consolidation of public sector banks to ponder over the
innovative structure of banks.
I cautioned the government that
having 20, or in its place, five
nationalized banks would not serve the purpose if they do the same type of
business, selling similar products and competing among themselves.
I advised that let there be
specialized banks:-
a)
Large
Banks for projects and infrastructure financing and having overseas presence;
b)
Small
and medium enterprises (SME) Banks to meet the needs of the SME sector, thus
aiding Make in India;
c)
Retail
Banks that concentrate on the retail and priority sectors, tax collection and
miscellaneous functions such as financial inclusion and subsidy distribution.
My suggestion was – let the consolidation
be based upon the core strength of banks, existing and proposed, and their
jurisdiction be clearly demarcated.
The government move is clearly in
tune with my suggestion. Finance Minster Mrs Nirmala Sitharaman, in her
presentation, has bifurcated the PSBs in three categories:-
1.
Banks
with strong national & global reach;
a.
Punjab
National Bank (+Oriental Bank of Commerce + United Bank of India)
b.
Canara
Bank (+Syndicate Bank)
c.
Union
Bank of India (+Andhra Bank + Corporation Bank)
d.
Indian
Bank (+Allahabad Bank)
e.
State
Bank of India (amalgamated earlier)
f.
Bank
of Baroda (amalgamated earlier)
2.
Banks
with national presence;
a.
Bank
of India
b.
Central
Bank of India
3.
Banks
with regional focus;
a.
Indian
Overseas Bank
b.
UCO
Bank
c.
Bank
of Maharashtra
d.
Punjab
and Sind Bank
Exactly on the lines of my advice,
government has divided the banks into three categories based upon their core strength, and their jurisdiction is also clearly demarcated.
Though in each category, number of banks are many, but with the passage of time,
each category will have only one bank. Government should be one player in the
market competing with the private sector. Public Sector Bank should be so
strong as to compete with private banks. It’s not rational that PSBs keep on
competing among themselves.
Regarding the clarification of the
government that this process of consolidation will rationalize the demand on
government finances for capital infusion, I had suggested in my
said article (Business Standard dated 09.03.2016) as below:-
“The capital requirement of these
banks should be stipulated. As the Large Banks would be competing with those
around the world, their capital requirement should be according to Basel norms.
SME Banks would mainly work within India, so their capital requirement could be
less than that of the large banks. Retail Banks’ capital requirement would be
the least, as their operations would be local, and they would have government
guarantee.
“Instead of giving capital
proportionately, let it be bifurcated into developmental capital and survival
capital. The bigger chunk should be allotted as developmental capital and given
to large banks and SME banks. Retail banks should be given only survival
capital. This way the government would not have to shell out a large amount of
funds and yet the social responsibility of public sector banks would be met”
TILAK GULATI
CEO
Banking Quest
