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Private sector banking ripe for consolidation
June 19, 2023
The private banking space is ripe for consolidation, as rising technology and compliance costs are making it harder for smaller banks to compete. In conversation with Business Insider, the CEO of Yes Bank, Prashant Kumar, says, “I am of the firm belief that consolidation is required. There is a huge fixed cost in banks, be it compliance or IT costs. There is a need for large banks. We have already seen the advantages of consolidation in the public sector.”
The government has already set a precedent by merging several public sector banks, or PSBs, to create behemoths. In 2020, the government merged several banks to create seven large PSBs with a balance sheet of over ₹8 lakh crore. The mega consolidation was undertaken to create banks which would have a scale that would be comparable to other global banks. The ultimate objective was to create greater scale and synergy, which would lead to cost benefits.
Kumar believes that the time is ripe for the same to play out in the private sector too. He reasons that as the sector needs players with a balance sheet size of over ₹5 lakh crore to feel relatively safe when dealing with unforeseen circumstances. The pandemic has demonstrated the kind of stress and risks that banks may have to face. Scale and diversified business models can enable these lenders to combat risks more effectively.
According to Kumar, “Banks with a smaller balance sheet size would be more vulnerable to uncertainties or shocks. There is a need for consolidation, which would make the private banking sector stronger. Consolidation as such in the private banking sector will help strengthen the private banking sector. Smaller banks would not be able to upgrade themselves, as the costs are huge.”
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