: As businesses go, banking is largely a commodity business banks borrow money from those who have excess of it and lend it to those who need it, and try to earn a spread. Brand recall matters, but more than that it is how favourable interest rates are, and how extensive and efficient a bank’s services are, that draw customers to it. With competition intensifying, spreads — the difference between a bank’s cost of lending and cost of borrowing — have shrunk from 4-5 per cent to around 3 per cent in just the last two years, and are expected to stay there. And banking stocks in general have trailed the broad market. Bleak times for the 38 listed bank stocks?
For weak banks, maybe. For decent and strong banks, not at all. Banking, along with a bunch of other sectors essential to India’s growth and progress, is tipped to be a winner. Growth patterns of banks tend to show a high degree of correlation with the economy. An economy growing at 8 per cent a year translates into 20-30 per cent annual growth in bank assets. A bank scaling up at such levels can easily offset the impact of diminishing margins, but not all banks will manage to do so. In a business where big is good and bigger is better, many will, in fact, struggle to stay competitive.
Everybody, from bank chiefs to the Reserve Bank of India to Dalal Street, thinks so, and are either baying or hoping for a clutch of consolidation moves in the sector. Last month, investors greeted the sealing of two alliances one loose (Corporation Bank, Indian Bank and the Oriental Bank of Commerce) and one tight (merger of Lord Krishna Bank into Centurion Bank of Punjab) with a 10 per cent rise in the BSE banking index, twice as much as the BSE Sensex. Says Hitesh Kuwelkar, associate director (research), First Global, a brokerage: “Consolidation is just what the sector needs now. Banking is a size game, as well as about technology and expertise. Those who understand this will be able to offer better products at lower costs.”
But as things stand today, translating that theory into practice isn’t straight-forward. There are synergies and areas of overlap between public sector banks, but mergers between them won’t be easy, as the Banking Regulation Act will have to be amended, which the Left is unlikely...
