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Revisiting bank consolidation

Consolidation among the dominant public sector banks has been on the policy agenda ever since the Narasimham Committee-II recommended in 1997 the creation of four or five large banks to take on international competition. But not much progress has been made so far, although there were occasions when the government tried to force the agenda. Any merger dictated by the government met with opposition from the trade unions and independent banking experts; in their opinion the costs far outweighed the likely benefits. Of late, the government has taken the position that the initiative for consolidation should come from the boards of the banks concerned and its own role, as the majority shareholder, would be a supportive one. There is an all-round realisation that the merger process cannot be hurried through or compressed into a short time frame.

The heads of the top five nationalised banks consulted recently by the Finance Ministry have done well to point out that the government should look for genuine synergies in terms of geographical coverage, and cultural and technological fit. However it is not going to be easy to lay down specific parameters for a merger. For instance, after nationalisation some of these banks became truly pan-Indian. A merger would result in duplication of bank branches at a number of centres. Theoretically speaking, the creation of larger units through mergers may sound attractive. Still, it is not just prudent but necessary to be circumspect while preparing the road map.

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