Large banks more efficient, scope for more mergers in the sector: RBI study

Headline : Large banks more efficient, scope for more mergers in the sector: RBI study

Details :

The News

  • According to a recent study “‘Labour Cost Efficiency of Indian Banks”, conducted by RBI, large banks tended to be more efficient than small banks, suggesting more mergers in future.

 

Bank Mergers: Important reports

  • In 1991, Narasimham (a former RBI governor) submitted his report on banking sector reforms, recommending mergers to form a three-tier structure with three large banks with international presence at the top, eight to 10 national banks at tier two, and a large number of regional and local banks at the bottom.
  • Later in 2014, the J. Nayak Committee had also suggested that state-run banks should either be merged or privatized.

 

About Indian banking sector

  • The Indian banking system is one of the largest in the world with 144,952 branches of 159 scheduled commercial banks (SCBs) catering to the needs of about 1.3 billion people.
  • Earlier the business model was primarily brick-and-mortar based (physical presence rather than virtual or online presences), however, since 2015, the spread of digital modes of transaction has increased significantly.

 

Study Summary: The Study analysis data for banks for the period 2005-2018

  • Increase in number of banks:
    • From 2005 to 2018, there has been increase in number of large banks (39 to 42) as well as small banks (37 to 42).
  • Fall in cost effective banks:
    • While India had 19 cost efficient banks in 2005, this number fell as low as 12 before recovering slightly to 14 by the end of 2018.
  • Labour Cost Efficiency decreased:
    • During the period 2005-2018 the labour cost efficiency of Indian banks moderated across all bank groups.
    • The deterioration was especially marked during 2011-2016, a period that was characterized by severe stress in the banking sector.
  • Large Banks more efficient than Small Banks:
    • Large banks were found to be more efficient than small banks.
    • Larger banks are labour cost efficient relative to their smaller counterparts as larger banks could reap the benefits of economies of scale (a proportionate saving in costs gained by large business operations).
    • This finding provides an additional rationale for recent mergers of banks and suggests that further avenues of consolidation in the banking sphere may be explored.
  • Public sector banks more efficient than Private banks:
    • Public sector banks (PSBs) are more efficient than private sector banks, which reflects deceleration in employment growth in addition to cost cutting through innovative techniques.
    • This opens up the direction of rationalisation in work flow by harnessing new technologies.

 

Conclusion:

  • More consolidation in India’s struggling banking sector will help lenders lower costs and efficiently scale their operations

 

 

 

Section : Economics
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