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When on Friday, Finance Minister Nirmala Sitharaman announced the mega merger of 10 public sector banks into four, she was in effect implementing a plan whose outline was contained in the report of an expert committee submitted nearly three decades ago. It was that report, whose main author, Maidavolu Narasimhan, is a 92-year-old former Governor of RBI, that talked about merging banks. Various governments and the Reserve Bank of India have all been guided by the report and recommendations. The committee, appointed by Manmohan Singh when he was Finance Minister and at the peak of the balance-of-payment and economic crisis in 1991-92, had suggested a new banking structure in India besides several other important measures in its two reports. What it envisaged then was a banking system with three or four large banks at the top with a global presence and size, eight to ten national banks which would cater to the needs of local industry and infrastructure, and a bottom tier consisting of a large number of regional or local banks.
The committee also favoured mergers to build the size and strength of operations for each bank. Since then, almost every major committee for financial sector reforms has suggested consolidation of banks or reducing the number of banks owned predominantly by the government. These include the committee appointed by the Planning Commission during the UPA government’s term and headed by Raghuram Rajan, the committee on fuller capital convertibility headed by former RBI Deputy Governor S S Tarapore, the one headed by Percy Mistry, apart from the RBI which laid out a blueprint in a discussion paper on the way forward for Indian banking.
The rationale of experts for pruning the number of government-owned banks, which was over two dozen, was that with economies of scale, they would be more efficient and profitable. Besides, with pressure on government resources and growing demands to fund social sector programmes, infusing capital for a large number of banks would be a drag for the government, especially with many banks unable to raise the required capital from the markets directly.