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"Consolidation alone will give banks the muscle, size and scale to act like world-class banks. We have to think global and act local and seek new markets, new classes of borrowers. It is heartening to note that the Indian Banks' Association is working out a strategy for consolidation among banks."

- P. Chidambaram

Late last year, Finance Minister P. Chidambaram met the heads of a few state-owned banks in Jaipur, Rajasthan. At the meeting, the Bank Chairmen were asked to express their views on consolidation in Indian banking. They were chary about discussing the matter but most believed that state-owned banks would be acquiring other banks - and wouldn't be acquired - should bank mergers and acquisitions (M&A) become the order of the day.

Within days of Chidambaram's clarion call for consolidation, public sector bank CEOs began furiously discussing which bank would gobble up which other bank.

Need For Consolidation

Consolidation in the banking industry is crucial from various aspects. The factors inducing consolidation include technological progress, excess retention capacity, emerging opportunities and deregulation of various functional and product restrictions. A strong banking system is critical for sound economic growth so it is natural to improve the comprehensiveness and quality of the banking system to bring efficiency in the performance of the real sectors. The past one decade has seen the transformation of the banking industry throughout the world from a highly protected and regulated industry to a competitive and deregulated one. Especially, globalization coupled with technological development has shrunk the boundaries by which financial services and products are being provided to the customers residing at any part of the globe. Further, due to innovations and improvements in service delivery channels, the trend of global banking has now been marked by twin phenomena of consolidation and convergence. The trend towards consolidation has been driven by the need to attain meaningful balance sheet size and market share in the face of intensified competition, whereas the trend towards convergence is driven across the industry to provide most of the financial services such as banking, insurance, investment, cash management, etc., to the customers under one roof.

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* Contributed by -
Pritesh Y. Chothani, Ritesh Sud & Rachna Srivastava,
PGDBM 2006,
IMT, Ghaziabad.