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September 22, 2005

Indian Banking Consolidation: Myth or (Delayed) Reality?

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McKinsey's Leo Puri makes the case in today's Business Standard that consolidation is not happening and is not on the cards for some very clear reasons.

"...competition levels have been increasing, but have not reached a point of unsustainability yet. Our banks are still able to sustain in the current form. Even less efficient banks are able to survive in this 'walled garden' where competition has not been allowed to freely come in. Though there are great opportunities in India, neither are private banks allowed to acquire PSBs nor are foreign banks granted a free entry."
"Moreover in any market, it is the leaders who enhance consolidation. But the leaders in Indian banking have no incentive to do this as they are doing relatively well in the 'walled garden'. They are not in a rush to play the role of the bridegroom. Thus, consolidation remains sub-optimal."

More after the jump:

Puri has been right on this issue before: in a 2001 piece for Mckinsey Quarterly (Revitalizing India’s banks, with Anu Madgavkar and Joydeep Sengupta) he went against the then-current wisdom that consolidation was imminent, saying:

"...full-scale foreign ownership of banks that are currently owned by the government is unlikely to come for at least three years, given the lack of political consensus on the issue and opposition to privatization."

H.N. Sinor, Chief Executive of the Indian Banks Association, disagrees, saying that despite "cynicism" over M&A we will "be seeing major consolidation efforts in the banking sector," citing "the need for efficient capital management under Basel-II norms which are likely to come into effect within 18 months."

Posted by The Banker at September 22, 2005 04:42 PM

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