Old private sector banks look to consolidate - Views on News from Equitymaster

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Old private sector banks look to consolidate

Feb 21, 2000

According to newspaper reports, three old private sector banks Sangli Bank, Ratnakar Bank, Ganesh Bank of Kurundwad have been asked by the Reserve Bank of India (RBI) to consider merging with United Western Bank. The RBI's decision was motivated by the fact that these banks, although profitable, have a low capital base (but meet the capital adequacy requirements) that makes it very difficult for them to grow in this increasingly competitive environment.

The RBI's decision is a step in the right direction, as it will ensure that the possibility of bank failures is dramatically reduced. With the Indian banking sector undergoing a dramatic change ushered in by the introduction of cutting edge technology, banks with access to little resources will find themselves left out as investors/depositors flock to those offering better services. These banks are profitable and meet the RBI's stipulated capital requirements, but they lack resources, which are needed to step up spending on technology.

A merged entity would have larger resources at its disposal. This could be used to increase spending on technology. Furthermore, with a larger distribution network and more funds to manage, the merged entity would greatly increase its competitive edge (larger reach) apart from benefiting from economies that are generated (larger amount of funds to manage). The latter would also contribute to improving the profitability of the four banks.

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