Tuesday, May 11, 2010

Cooperative Banks to merge with Commercial Banks?

Coop Banks to merge with Commercial Banks in India?

This is an unpalatable development and a death blow to the Commercial Banking System in India.  During the early years after Independence, cooperative banks were found to be not serving their purpose, and were not viable to be set right.  Commercial Banks were asked to go rural beginning with Imperial Bank of India nationalised as State Bank of India in 1955.  This was followed by take over of eight State-owned banks - viz., Bikaner, Hyderabad, Indore, Jaipur, Mysore, Patiala, Saurashtra and Travancore to merge as seven subsidiaries (SBBJ being one bank) of State Bank of India in 1957.

Later, in 1969 and 1980, the Indian banking system witnessed two major nationalisations of fourteen and six private banks to be brought under the public-sector fold.  The State Bank Group and Public Sector Banks were handed over the agenda of opening rural branches, spread banking at village level, take up agricultural finance in a big way and follow the Lead Bank Scheme introduced in 1969.  No doubt, it affected their bottom lines as initially they were not cut to handle such business while cooperative system was co-existing and had burnt their fingers too.  The new banks had no choice of their business, pricing, customers, etc.

Then came year 1975, when on the recommendations of some high power committees (during the Emergency regime), the new concept of low-cost, locally staffed concept of Regional Rural Banks whose capital is contributed by the Central / State Governments and Sponsoring PSBs.  Each such RRB was expected to serve a contiguous area of one or two districts in a State, preferably by the Lead Bank of the District. Initially, the manpower requirement was supported  by the sponsoring bank. As many as 196 RRBs were floated to serve the one or two contiguous districts all over the country, again for rural lending.  All of them have also been consolidated in recent years; they number around 89 or so now.

Enter the era of Financial and Banking Sector Reforms in 1991 (after the Public Sector banking system was in a very bad shape in terms of productivity, profitability, automation, pricing, customer service, etc).  Almost all the PSBs and private banks were also hit by the wave of Harshad Mehta's Stock Market Scam in 1992. Their Balance Sheets went out of shape and needed serious corrections - thanks to the introduction of Basel norms, prudential norms, etc. Concepts like Capital Adequacy Ratio, Prime Lending Rate, Asset Liability Management, Risk Management, etc have entered the banking scene gradually while computerisation came very handy tool to manage the huge business levels and demand for productivity and efficiency.

The concept of Local Area Banks in 1995 (brain child of Mr P Chidambaram) did not take off well.  They were private sector rural banks with a higher capital of Rs. 5 crores covering two to five districts in a State. Today, hardly four such LABs are functioning. RBI took a policy to stop further licencing of LABs.  Islamic Banking was not permitted to be undertaken by banks in India.  Micro Finance has entered the Indian scene slowly and steadily.  Financial Inclusion is the buzz word today.  Non Governmental Organisations, Business Correspondents, etc as also franchising and outsourcing is the order of the day.  Technology has been heavily introduced in the banks in India. 

After nearly two decades of reforms, there is a highly efficient and transparent level playing field in the Indian banking scene.  Foreign Banks, though permitted to enter the field, are very selective and are very apprehensive of their profitable operations.  At this juncture, when consolidation of PSBs and Private Banks did not receive the nod from different circles, it is interesting that cooperative banks are being attempted to be consolidated to merge with Commercial Banks.  We need to wait and watch for the policy to be announced and to see the outcome as to who would be the real beneficiaries of such a move?  The staff, the depositors or borrowers, the regulators, or the politicians?  God save Indian Banking!

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