Amidst the ongoing talks of consolidating small state-run banks to create one or two globally large size banks, Reserve Bank Governor D Subbarao on Tuesday cautioned against making a ‘too-large-to-fail’ banks, saying what is needed is not a monopolist but a number of comparatively large banks.
Citing the 2008 credit crisis, which was triggered by too-big-to-fail banks, Subbarao said, “we don’t need monopolies, instead we need four-five banks of big size, as large banks can become too-big-to fail, leading to moral hazard problems.” He also said “too large banks lead to complexity and too-big-to-fail or too-connected-to-fail moral hazards with adverse impact on financial stability”.
He also said though consolidation brings in higher capital base facilitating increased lending activity and faster GDP growth, apart from boosting infra financing, and meet demands of corporates, both at home and globally, apart from cost efficiencies and focused supervision, he said it also brings in regulatory issues. “Significantly big banks can resort to monopolistic practices that may result in unequal competition and distortive and even predatory behaviour in the market. Such practices can also blunt the monetary transmission and market mechanism for efficient allocation of resources,” he said.
Addressing a Ficci-organised banking summit here, he at the same time said that it will take several years for the country’s banks to achieve the status of a large global bank. “Our biggest bank (SBI) is ranked at about 60 in the global league of large banks. It may take years for our banks to become global players by way of organic growth. However, we should aspire to have a few Indian multinational banks in the near future by selective acquisition, as large banks may dilute the benefits of competition.”
It can be noted that Finance Minister P Chidambaram had in May also called for consolidation in the banking sector to create a few large Subbarao noted that bank consolidation assumed significance after the introduction of financial sector reforms beginning early nineties. Stating there is significant skewness in the size of banks, he said “our second largest bank is almost one-third the size of the biggest bank (SBI). This creates a monopolistic situation.
“The task is to ensure that there are at least four-five banks of comparable size at all times to ensure that consolidated banks do not acquire monopolistic market power, adopt predatory behaviour and force smaller banks into unviable models,” Subbarao said. Supporting small banks, he said, they have a comparative advantage in the supply of credit to small businesses, farmers and other unorganised sector entities, thereby furthering the cause of financial inclusion.
“Small local banks are more nimble and flexible. They can effectively cater to unbanked areas and meet localised needs and can also be more efficient in financial inclusion,” he said, adding failure of a small bank will not have any systemic impact and resolution would be easier.
‘CRR, SlR could come down further’
Outgoing RBI Governor D Subbarao, who had disagreed with bankers’ call to further trim the cash reserve ratio or pay interest on these deposits, and cut SlR, on Tuesday said “perhaps” there is a need to reduce these rates. “I do recognise that there is a demand, and perhaps a need, for further reduction (in CRR and SlR),” he told the FIBAC summit, the premier annual banking summit here.
The Governor, however, added RBI has “progressively” brought down mandatory ratios on both CRR, or the portion of deposits banks park with RBI as a solvency buffer, and SlR, another solvency tool under which banks have to subscribe to government bonds and other liquid assets, over the years.