Consolidation

CONSOLIDATION IN

INDIAN BANKING SYSTEM

LEGAL, REGULATORY AND OTHER ISSUES

SEPTEMBER 2004

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INDIAN BANKS’ ASSOCIATION

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Indian Banks’ Association

Preface

The prevalence and success of consolidation in the banking sector across the world and the compulsions imposed by globalization will make this dictum more visible in the Indian financial system in the near future. The financial sector reforms set in motion in 1991 have greatly changed the face of Indian banking. While the banking system in India has done fairly well in adjusting to the new market dynamics, it would not be clichéd to reiterate that greater challenges lie ahead.

The financial sector would be open to international competition once the tone for the rules of the game are set under the WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel-II as they compete with banks with greater financial strength.

In the past, mergers were initiated by regulators to protect the interest of depositors of weak banks. But it is now expected that market led mergers may gain momentum in the coming years. The smaller banks with firm financials as well as the large ones with weak income statements would be the obvious targets for the larger and better run banks. The pressures on capital structure in particular is expected to trigger a phase of consolidation in the banking industry and the pace would be swifter than we can conceive of today.

In the IBA document “Banking Industry: Vision 2010”, it is visualized that mergers between the public sector banks, or public sector banks and private sector banks, could be the next logical thing to happen as market players tend to consolidate their position to remain in the competitive race. The system needs to be prepared for such a scenario and in this context it was felt that there is a need...