FM for merger of banks to create 2-3 global entities

Finance Minister P Chidambaram on Monday favoured mergers in the banking industry so that India can have two-three global sized banks. He said India needs two or three world-size banks in an economy that is poised to become one among the five largest in the world.

“There are other sectors that may well need restructuring .... For example, some banks, including some public sector banks among 26 public sector banks that we have, may be better off merging.

“The need for two or three world-sized banks in an economy that is poised to become one among the five largest in the world is rather obvious," he said in the inaugural lecture on the occasion of Annual Day of Competition Commission of India.

Favouring mergers of banks, he said, "We have seen bank mergers lead to too-big-to-fail entities."

Chidambaram further said while restructuring may be needed in some sectors, mergers may reduce competition in certain segments or geographies substantially and may alter competition between banks and non-banks. There, he said, the Competition Commission of India had a role to play.

“Are our regulators well positioned to evaluate the consequences to competition in different sub-markets and across regulatory jurisdiction?," he asked. In the annual monetary policy, the Reserve Bank of India had said it would release a discussion paper on banking structure in India by end-June 2013.

Chidambaram also called for the competition policy to play a role in bringing private players into grain procurement, which until now is a government monopoly. “An often neglected area of competition policy is public procurement. In the case of agriculture the minimum support price (MSP) and open-ended procurement have served our farmers well.

But can we procure in a better way? Currently, as a result of how the MSP and procurement policy are set, the government is the largest and in many ways the only bulk buyer of cereals. But, in the process, it is crowding out of private sector procurement,” he said.

The discussion paper, among other things, would cover issues such as consolidation of large-sized banks with a view to having a few global sized banks and desirability and practicality of having small, localised banks as preferred vehicles for financial inclusion.
Country's largest lender State Bank of India (SBI) has acquired board approval for the merger of its remaining five associates with itself. It has already amalgamated two of its subsidiaries.

SBI merged one of its associate, State Bank of Saurashtra, with itself in 2008 besides merging  State Bank of Indore in 2010 with itself.