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In September 2020, Nirmala Sitharaman, the Indian Finance Minister (FM) had categorically mentioned that the Indian banking industry needs more digitisation and consolidation for its long-term survival. She said this while she was addressing the 74th Annual General Meeting (AGM) of the Indian Banks’ Association (IBA).

On consolidation and digitisation

Sitharaman said that India needed four to five ‘SBI size’ banks to meet the growing needs of the economy and the industrial sector. She also said that the industrial sector needed to imagine how the Indian banking sector had to be in the immediate and long-term future. What did the FM mean, as far as long-term future was concerned? In explaining it, she mentioned the importance of digitisation. She said that it was going to be largely driven by digitised processes.

An amalgamation plan was made in 2019. As a consequence, the Oriental Bank of Commerce and the United Bank of India were merged with the Punjab National Bank and the Syndicate Bank merged into the Canara Bank. Also, the Andhra Bank and the Corporation Bank were amalgamated with the Union Bank and the Allahabad Bank merged with the Indian Bank. As of now, there are seven big PSBs and seven small PSBs. Earlier, there were 27 PSBs in India.

Digitisation of the PSBs

Digitisation of PSBs as well as private sector banks has been a matter of discussion among observers and specialists. There are views in favour and against digitisation. A few days ago, the Confederation of Indian Industries (Eastern Region) and Sumedha publishers published a book on some contemporary issues in Indian banking. The book covered elaborately the importance of digitisation of banking, particularly the PSBs. In the chapter, Digital Disruption in Banking, it said, “The rapidly evolving digital landscape has greatly impacted the banking and financial Industry. Traditional banks, who were reluctant to move with digital transformation are facing challenges to their existence.” In the lockdown phase, digital banking has become largely popular. The book pointed out, “During this time, the adoption of digital financial services has witnessed a massive jump and changed the financial ecosystem in a big way.” It also mentioned, “India is one of the fastest growing digital financial services (fintech) markets in the world.”

In the chapter Way Forward, it has suggested, “They (banks) might have to build a completely new operating model, including re-skilling their employees and retooling their processes in a way that harness technology and data to customers.”

Can consolidation and digitisation be a foolproof way for sustenance?

In a recent article in the Indian Express (September 26, 2021) Jahangir Aziz, Head, Emerging Market Economics, JP Morgan, wrote, “It is the strongest signal yet that no corporation is ‘too big to fail’ and there is no state guarantee for them.” He wrote this in the context of the recent failure of Evergrande, one of the biggest Chinese banks. So, amalgamation of banks may not be a well thought out policy for the Indian banking sector. The idea of ‘too big to fail’ was questioned in 2007 as well, during the global financial crisis, when some of the biggest financial institutes globally and in the US, including Lehman Brothers failed within a short span of time. On the other hand, India witnessed0 a high growth phase between 2005 and 2012.

Digitisation may be helpful for the banks in the coming days but it cannot be a precondition for their sustainability. The most important thing, according to many economists and bankers, is that the degradation of asset quality of the PSBs was not fully an endogenous factor. Rising NPA was, mainly, caused by factors that were external to the banks. Additionally, the quality of human resources has been deteriorating. According to a recently published article in the Economic Research Foundation by CP Chandrashekar and Jayati Ghosh, “The industry today faces the threat of lack of availability of trained manpower in future as the recruitment has slowed during the last 20 years.” Chandrashekhar and Ghosh also pointed out that many banks have been resorting to outsourcing of certain jobs like credit appraisal, legal audit and work involved with due diligence about prospective buyers. These jobs are related to intellectual application. Therefore, without substantial scope for intellectual application, there is always the risk of failure.

The Indian government has to take many other well-researched policies for ensuring the development of the banking sector. Several researches on the history of merger and amalgamation of banking in the US, Europe and India (Chandrashekhar and Ghosh) indicate the futility of the exercise.