Motives for consolidation in Indian banking sector

Consolidation is a buzzword nowadays, pronouncements made by finance minister, Mr.Pranab Mukerjee as well as some senior bankers are keen on having mergers among banks, especially public sector banks as the banking sector will be opened for international competition and foreign banks will have the opportunity to own 74% of Indian private banks, secondly, because of Basel lI norms, there is requirement for more capital. In this paper an attempt is made to study the structure of Indian banking sector and its effect on competition by Concentration ratios of top three, five and ten banks from 1995–96 to 2007–08 for all the four variables. As the concentration ratio has declined in all the four variables namely assets, deposits, advances and income, and CR ratio is one among the lowest in cross country analysis. Hence, strategy of consolidation among banks leaving the top five is suggested as it will enhance more competition and efficiency and will lead to synergies of cost reduction, risk management, technology upgradation and economies of scale and scope and efforts should be made to achieve optimum size, as too large banks leads to diseconomies and this strategy will strengthen the banking sector as over competition can kill.