As the Reserve Bank of India prepares to dole out licences to corporate houses and others for launching new banks, India’s 26 public sector banks (PSBs) are watching the situation carefully.
For it could prove a shot in the arm for Finance Minister P Chidambaram, who wants some of them to merge with their bigger peers.
With new private banks in the play, the going could become more difficult for the old-school state-run banks, already losing business and market position, forcing them to think hard towards consolidating and forming larger entities to garner big-ticket deals.
An executive with a small state-run bank said, “PSBs are already staring at shrinking margins and rising bad loans due to economic downturn and they fear worse when a new breed of private sector banks mushrooms.
"Small state-run lenders are worried that new bank licences may make their survival difficult, forcing them to fulfil the government’s wish of consolidating with bigger banks.”
On July 1, RBI had received 26 applications for new bank licences.
While the government is saying no cap has been prescribed, RBI has made it clear all eligible applicants may not get a licence, the first of which might be given by March 2014. Since the eligibility criteria are stringent, not more than half a dozen might be able to meet them.
This might be a breather for the PSBs, as just a couple of new banks might not be able to deal a major blow to the state-run banks, which have 70 per cent of market share.
The entry of YES Bank and Kotak Mahindra Bank about a decade ago did not have much impact on PSBs.
However, this could be temporary relief because the expansion of new banks would come at the cost of PSBs.
“New banks will take good clients of PSBs, as existing private sector lenders would not let them poach their clients.
"New banks will be superior in terms of quality of service, information technology,” said a government official, who did not wish to be identified.
While old private sector banks fear consolidation the most, small and midsize PSBs that could be a target of consolidation include Punjab and Sind Bank, Dena Bank, United Bank of India,
The official, however, added consolidation would still not be a cakewalk for the government unless it agrees to reach out to bank employee unions, which are resisting the move.
When it takes State Bank of India at least two years to complete amalgamation of a subsidiary, other banks would take even longer, due to the differences in their culture and geography, he added.
According to RBI guidelines, it is mandatory for new banks to open 25 per cent of branches in rural areas but in metros, most of their growth is likely to come from unsatisfied customers switching over from PSBs.
Some loyal customers might, however, prefer to stick to public sector banks.
These customers consider their money safe with a government institution.
“The aim for new bank licences is financial inclusion.
But how would that be met? When PSBs are not ready to go to remote areas because viability is not there, why would a private bank invest there?
So, new banks might not be viable in the initial years of their operation.
However, government spending on programmes like food security will generate demand in rural areas and that may provide an opportunity to these banks,” said a former executive of a large government bank.
Current account and savings account deposits of PSBs are coming under pressure and many are expected to report a dip in their business income at the end of the quarter ended June, compared with the one ended March.
Consolidation can help PSBs achieve economies of scale.
The banking system saw about a dozen mergers between 1990 and 2000, and 15 amalgamations in the last decade.
While mergers of banks with weak financials dominated the first decade, the second saw mergers between healthy banks, driven by commercial reasons.
In December 2009, the finance ministry had called chiefs of five leading public sector banks -- Punjab National Bank, Canara Bank, Union Bank of India, Bank of Baroda and Bank of India -- to take their views on consolidation.
Owing to stiff opposition from employee unions, the idea was dropped.
This is the first of a three-part series on how new bank licences would impact public sector lenders