Banks consolidation raising monopolistic concerns, says IMF

Consolidation in the banking sector has led to a monopolistic competition framework, similar to developed countries and other emerging markets, despite the fact that nearly 75 per cent of the banking assets in the country is with state-owned banks, an International Monetary Fund (IMF) working paper has said.

The paper on 'Competition in Indian banking', by A Prasad and Saibal Ghosh which examined the degree of competition during the two sub-periods of 1996-99 and 2000-04 among state-owned, foreign and private banks, the paper concludes that banks operated in a competitive manner during the two periods and across bank groups.

It further concludes that there is scope for further consolidation in the banking industry without compromising competition considerations.

The increase in competition is evident from the fact that the assets of public sector banks as a percentage of total commercial banking sector assets declined from over 90 per cent in the beginning of the 1990s to around 75 per cent at the end of March 2004, a decline of roughly one per cent a year over the 15 year period, the paper said.

"There is also an increasing convergence in activities as reflected in the overlapping of activities between banks and financial institutions," it said.

The paper noted that the share of interest revenue as a percentage of the total assets across bank groups has recorded a continuous decline during 1996-2004, with the most notable being for new private sector banks in 2002.

"This was driven by the effect of the inclusion of a significant merger in this category which significantly raised the overall asset share of these banks without concomitant increase in revenues," it said.

At the same time, the non-interest revenues of banks have been increasing significantly in recent years. "Share of non-interest revenues as a percent of total revenues for public sector banks doubled from 8-10 per cent in 1992 to 18-20 per cent by end 2004," it said.

According to the paper, in the era of benign interest rates, the interest income of banks has been declining whereas their fee incomes have risen, driven by higher treasury income on government securities.

"This is likely to have lowered the ratio of interest to non-interest income. The lowering of this ratio has been associated with higher total revenues," it noted.

It pointed out that the unit price of capital, defined as other operating costs to fixed assets, has over the period 1996-2004 tended to remain high on an average, reflecting the higher operating expenses of banks, especially public sector banks.