Subbarao cautions on ‘too-big-to-fail’ banks

BL :PTI :MUMBAI, AUG 13:  2013

The Reserve Bank of India wants at least five banks of comparable size to ensure that consolidated entities do not acquire monopolistic market power, adopt predatory behaviour or force smaller banks into unviable models.

Speaking at a banking conclave organised by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks’ Association, RBI Governor D. Subbarao said the size of banks in the country is significantly skewed. The second largest bank in the system is almost one-third the size of the biggest. This creates a monopolistic situation.

Significant big banks can resort to monopolistic practices that can blunt the monetary transmission and market mechanism for efficient allocation of resources. Citing the 2008 credit crisis, which was triggered by too-big-to-fail banks, Subbarao said, “We don’t need monopolies… as large banks can become too-big-to-fail, leading to moral hazard problems.” He also said consolidation could pose problems of technology migration, customer attrition, cost of implementation, besides raise HR issues of seniority, salary, transfer, promotion, parity in perks and litigation. Large banks will not be able to provide the personalised services small banks offer.

Further, Subbarao added that consolidation expands the capital base, facilitating increased lending activity and faster GDP growth, apart from boosting infrastructure financing, meeting demands of corporates, bringing in cost efficiencies and focused supervision. But it also raises regulatory issues.

Saying it will take several years for the country’s banks to achieve the status of a large global bank, Subbarao said, “Our biggest bank (SBI) is ranked about 60th in the global league. “It may take years for our banks to become global players by way of organic growth. 

However, we should aspire to have a few Indian multinational banks by selective acquisition.” In May, the Finance Minister had called for consolidation in the banking sector to create a few global-size banks.