MUMBAI: The Reserve Bank of India has changed its stance on bank consolidation arguing that advantages of scale have been diluted after the global financial crisis. The comment was made by RBI deputy governor Subir Gokarn in the context of increasing depth of banking services in the country. Speaking at a seminar on infrastructure finance organized by the Federation of Indian Chambers of Commerce and Industry (Ficci), Gokarn said, "There is some debate that has not been resolved as to what the right size of a bank should be. I am sure that it is a function of a lot of variables, but at the end of the day the unambiguous argument in favour of size has beendiluted somewhat by the experience of the crisis, rightly or wrongly so." The deputy governor said that RBI has been exploring the issue of new licences of late and clearly felt a need to build new capacity in the banking system. "You could argue that new capacity does not necessarily mean new institutions and new capacity could be created by existing players as well, and the point about banks being relatively small has been raised. I think there are two sides to this issue. Yes, there are benefits of economies of scale and the ability of banks to deliver services more efficiently as they grow in size. But as we have started to emphasize in the wake of the crisis that large banks are not necessarily safe banks and the larger they get the more of a risk they pose to the system." In his presentation, Gokaran highlighted the benefits of competition in other sectors and said that there was no reason why similar benefits should not accrue to the banking industry
Source: Times of India
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