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Banking industry needs consolidation
June, 02nd 2008

RBI is constantly encouraging urban and rural cooperative banks to become strong and self-sufficient

The Reserve Bank of India (RBI) deputy governor V. Leeladhar is all for consolidation in the banking industry so larger banks have more fire-power to combat competition and reach out to the unbanked, but he doesnt want regional and cooperative banks to be ignored because they play a crucial and, sometimes, lone hand in financial inclusion.

If we think that commercial banks will be able to...(practise) financial inclusion in a cost effective manner in rural areas, we are 100% mistaken, he said on Friday at a banking conference organized by Mint in Bangalore. It is left to the rural and urban cooperative banks and many other arms of the financial system to achieve the obligations of financial inclusion, he added.

RBI is constantly encouraging urban and rural cooperative banks to become strong and self-sufficient, he said. Starting this year, RBI is giving licences to cooperative banks to open new branches.

We have permitted them to have ATMs (automated teller machines), which is a big development. We have permitted them to have currency chests, which was never permitted, Leeladhar told a gathering that included several chairmen and CEOs of banks. A currency chest is a vault or safe that belongs to RBI but is kept on the premises of a bank and managed by it on behalf of RBI.

We have convinced the state governments to initiate audit of the banks, with deposits of more than Rs25 crore, by professional independent chartered accountants as against the earlier system of audit by people who had no prior experience in auditing, he said.

Inclusive agenda: Reserve Bank of India deputy governor V. Leeladhar. (Hemant Mishra / Mint)

Inclusive agenda: Reserve Bank of India deputy governor V. Leeladhar. (Hemant Mishra / Mint)

Commercial banks, on the other hand, should expand and consolidate and enter the global markets, Leeladhar said. I still feel, as I used to advocate when I was chairman of Union Bank, that we do not require such large number of small commercial bankswe require small numbers of large banks.

Comparing the situation with Malaysia where the number of banks has come down to eight to nine large banks after consolidation from 38 earlier, Leeladhar said there could be healthy competition among large banks in India.

Large banks will also have more clout in the international arena due to the size of their balance sheets, which a fragmented banking industry could never achieve otherwise, he added.

I have seen hundreds of applications by our commercial banks rejected by other countries saying, What is the size of your bank? Why do we require such small banks to open branches in our country? There are many cases like this where applications have been rejected only because we look like pygmies in that whole system, he said.

The deputy governor of Indias banking regulator, however, clarified that consolidation would not and should not come at the cost of inclusion which is on the agenda of both the central bank and the government. Regional and urban cooperative banks can reach out to the masses with the responsibility of financial inclusion, he said.

Leeladhar suggested that to attain wholesome financial inclusion, commercial banks should help strengthen the system of regional rural banks (RRB) and other cooperative bodies. Look at RRBs of Canara Bank, look at RRBs of Syndicate Bankhow well they are functioning! At the same time, look at RRBs of Uco Bank or United Bank, you will see they are incurring huge losses, Leeladhar said. Which only goes on to show that in this concept, bank supervision counts, he added.

Some RRBs have far superior customer service than the sponsor bank or other commercial banks, private and public, that we are so proud of. I have observed that they have a genuine concern for their customers. Which only shows that they can independently handle financial inclusion in an effective manner, Leeladhar said.

The Bangalore conference saw a discussion between the chairmen and CEOs of several banks on consolidation, competition, and inclusion.

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