Bank consolidation is bad for financial inclusion
Mumbai: The Reserve Bank of India (RBI) has raised concerns about bank consolidation, saying it increases the market power of merged institutions and hurts financial inclusion.
According to the Money and Finance report released by the RBI on Friday, consolidation could also lead to less competition by providing less choice to the customer and could also lead to uncompetitive pricing of products. “In the future, to increase competition in the field and foster innovation, the RBI’s ‘on-demand’ licensing policy for universal and small-scale financial banks could be used effectively,” says The report.
According to the report, mergers have helped strengthen banks’ capital buffers, but it is difficult to isolate the impact of mergers from other forces acting simultaneously. Referring to the mega consolidation of Public Sector Banks (PSBs) where 10 merged into four, the RBI said that factors such as government ownership, similar pay structure for staff and common core banking solutions simplified the merging process.
Noting that the government has injected Rs 2.9 lakh crore over the past five years into public sector banks, the RBI said this has helped the PSBs improve their capital adequacy ratio to 14.3% in December 2021 compared to 11.8% in March 2016. This injection of capital helped the banks lift the lending restrictions that the RBI imposed on weak PSOs as part of its rapid corrective action plan.
“However, capital injection should not substitute for better governance and risk control,” the RBI said. PSOs faced the risk of moral hazard from implicit government guarantees and repeated, unconditional recapitalizations, as well as the lack of market discipline, according to the report. The RBI has suggested that the government only provide capital to banks that are successful in controlling bad debts.