Many or Few – A banking conundrum

   By Kuldip Maity ,  16-Dec-2019
Many or Few – A banking conundrum

It’s being argued that India has one of the lowest bank concentration ratios in the world or the percentage of banking assets held by the top five banks in the world. This argument essentially pins its hope on merger and consolidation to shore up the per bank asset.

The debate over whether India needs many or a few banks remains to this day an unresolved debate. The resolution depends on the context and there is hardly any unanimity on whether it needs to be seen from the customers’ perspective or the banks’. 
The then Union Finance Minister, late Sri Arun Jaitly, held the view that India does not need more banks but strong banks. Even in the context of what constitutes a strong bank has driven a wedge between the advocates and critics.
At this juncture, therefore, it’s important to revisit the issues in the context of the needs from the customers’ and the banks’ perspective. In 2013, the then Deputy Governor of the Reserve Bank of India, while addressing a conclave of retail bankers held that the retail customers were underserved by the industry. He was laying down the context of the deliberations for the bankers.
The banking system, has he saw it, has evolved through phases that can broadly be classified under three categories.
a) Initial phase
b) Intermediate phase
c) Advanced phase
In the initial phases of banking, the basic business was all about simple savings, credit and remittances. In the next phase evolved the concept of lending for consumption purposes and in the third and the advanced phase the banks started providing high-end savings and investment products.
If we look through the three phases, we find intermediation happening in distinctly distinct categories. In today’s market, the retail banking is understood by its most visible parts – a) mass retail banking, and b) class (private) retail banking. While the first category, as the name suggests, caters to the mass with almost homogeneous products, the second is for the high net worth individuals with highly differentiated products to suit, so to say, individual or same group needs.
What is important to note that for a very long period of time, in India, banks evolved in a manner as to be comprehensive financial intermediation agencies catering to all financial needs of all categories of customers under one roof.  This probably is the reason that is singularly responsible for all the issues that we are facing today as the country grows and takes its seat among the global super power.
It was the also the melt down in the global finance around the beginning of this decade that brought the crisis to hog headlines on our shores. And we have been grappling with it since. The issue with all banks offering all sorts of products to all sorts of customers may also be seen as a potential source for trouble some of which have already struck us with devastating consequences.
The argument for a few larger banks is also the outcome of these consequences. It’s being argued that India has one of the lowest bank concentration ratios in the world or the percentage of banking assets held by the top five banks in the world. This argument essentially pins its hope on merger and consolidation to shore up the per bank asset.
But given the Indian perspective, the issue probably is more complex than it appears. The problem essentially stems from each entity doing everything. A retail structure serving also the entrepreneurial need may structurally find it difficult create a strategic delivery model serving both ends of the spectrum with equal facility.
In the general retail structure the banking needs of the customers are homogeneous. The risk profiling is also not so differentiated conceptually as to make it a huge ask. It’s about non-entrepreneurial risks. However, the retail banking structure can graduate into class banking and small and tiny entrepreneurial need servicing. Many experts are of the opinion that the needs of small entrepreneurs are not much different from those of retail customers from the banking industry’s perspective.
Be that as it may, the issue becomes a little more complicated as the PMC testifies. With the banks going beyond the retail and getting into big entrepreneurial need servicing, the spectrum of banking in terms of risk exposure became complex – as some would say detrimental to the retail customer needs.
Historically, the banks in India for a long time stayed tuned to the retail needs and serving, again relatively speaking, the needs of a handful of business entities. With the opening up of the market and the burgeoning business interests, the banking system has not shown the needed elasticity in terms of serving the niche needs in a compartmentalised way. The bank that had the mandate in serving a retail and tiny customer at the margin was also called upon to serve the credit needs of a business behemoth.
The point to note here is that the business of financial intermediation in sync with the growing economy also got diversified. With such diversification it has become increasingly unrealistic to expect a bank that serves the needs of high-end finance.  The issue such extended risk book also puts retail users’ money at stake too.
The needs of the general retail and financial retail on the one hand and high-end intermediation being different one could perhaps argue in favour of the currently evolving sequestered banking structure.
Given this perspective, from the general interest perspective, one may not be entirely wrong in supporting the cause of fewer banks at the big league operations. As for many, one would rather side with the system of generating smaller banks to serve the needs retail banking.
A merger at that level and bringing down the number would bolster the balance sheets leading to a significant hike in percentage of banking assets by them and provide them with the strength in a sequestered way to cope with the high risk intermediation.
But given the fact the Indian financial market, though is growing has yet to mature in a way as to make the financial inclusion mandate irrelevant. The issue of creating access and awareness still remains a challenge. Structurally, the degree of nimbleness required in operations in the inclusion structure makes a bigger bank lock up huge resource and they may not be as effective as a smaller entity.
Herein the logic of structure like ‘small bank’ gains traction. Smaller banks with organisational structure more suited to the smaller customer needs could perhaps be more suited to serve the purpose of the inclusion mandate along with other institutions specifically created for needs like empowerment. 
At the retail level banks have to be sensitive about individual customer’s needs. The example that gets quoted in the relevant circle relates to the needs of a migrant labour and a village labour. Assuming that both of them have the same amount in their accounts, their needs would yet be different. A smaller bank perhaps would be organisationally more nimble in being sensitive to such differences in needs at the smaller retail level than a behemoth financial unit.
If this argument is accepted then advocating a larger number of smaller banks to address the mandate of financial inclusion might be in order. Such a structure would not only create the strength but also the depth in Indian banking as is being sought.