Privatisation lobby of Public Sector Banks (PSBs) by industry bodies and the so-called intellectuals though jingled funny initially in the unfortunate event of Punjab National Bank (PNB) fraud, the tone of industry professionals, moreover the regulator in equal footing, has created unpleasant situation and has intensified the privatisation of PSBs debate in public domain. For long the PSBs have been outrightly getting criticised for their bad governance, poor lending decisions and inadequate risk control measures etc. It is practically unfair in comparing the performance of PSBs with a segment of private peers, ie, new private banks as the PSBs are compelled to cater social banking at hinterland, where profitability is a serious challenge. At the same time, the private peers concentrate on the city centres and urban areas in selecting quality borrowers. No doubt the state-run PSBs has a greater role in contributing to the nation-building in extending banking services at the remote rural areas in fulfilling the financial inclusion goal of the nation, where private banks never dare to operate.
The immense contribution to nation building by PSBs has come with a cost of escalated impaired assets and loss of competitiveness of many existing PSBs. Today’s Indian banking has 21 small and large PSBs catering to the same target group, same product segment and same geographies competing within and between. Being owned by a single entity and at the same time competing among themselves, do not optimise the use of limited resources and hence strengthens the consolidation argument. It does appear that the Indian banking is too fragmented at present, especially in comparison with other key economies. The five-bank asset concentration in India is way lower than in several other emerging peers. The latest available data from Global Financial Development Report 2017-2018 shows that the share of top five banks’ asset in India is lower than other BRICS economies. As large banks reap certain advantages in terms of efficiency, risk diversification and capacity to finance large projects, we cannot deny that India needs to develop a few large banks. The efficiency gain resulting from lower cost and elevated quality of services is too attractive to ignore in that context. There is ample scope for consolidation in this sector without creating issues of moral hazard.
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