Consolidation in the Indian banking industry

Abstract

This paper aims to address some of the contemporary issues facing the Indian Banking industry today. Overall it attempts to cover the following issues: 1. Post 2009, foreign banks will be given the same freedom to open branches, acquire competitors and plan for growth that their domestic counterparts now have. This will be a big event for the Indian banking industry which will transform the business of banking in many ways, which would be reflected in terms of greater breadth of products, depth in delivery channels and efficiency in operations. Indian banks which were till now protected in some sense will be exposed to the big multinational banks. In this light, consolidation by Indian banks seems to be a good and probably the only option to stand up to the competition. This paper builds a case for consolidation in the Indian banking industry based on case studies of countries worldwide and by highlighting other positive effects of consolidation on the sector. 2. Currently, the Government of India is not allowed to dilute its stake in the public sector banks below 51%. For many of these banks the government holding is already around the 51% mark. As these banks grow they will need more funds to satisfy the minimum capital requirements. Also, the impending Basel II norms will costs these banks a lot and will hit their Tier 1 capital. This paper, by way of numerical analysis, attempts to find out the potential capital shortfall that these banks might face in the next few years and lays down the option in front of the government to respond to the same. 3. While in most other countries foreign bank entry took the form of direct takeover or majority shareholding, foreign investments in China’s banks have been minority shareholdings with very limited management involvement. Increasing foreign participation has been one of the key trends in the Chinese banking system in recent years. The paper studies the positive effects of foreign minority stakes on the Chinese nationalized banks and argues for the same for the Indian banking industry. 4. ICICI Bank has been the star performer in the Indian private sector banking industry over the past few years. It has been the one driving the changes in the retail banking and has been aggressively pursuing various new initiatives. Off late there has been a spree of fund raising by the bank the purpose of which can at best be guessed. This paper tries to speculate the possible reasons for this capital buildup and extend them to the growth path of private sector banks in India