The Reserve Bank contention that mergers and acquisitions among banks should to left to it, and not the newly functional Competition Commission, is valid and the necessary changes in the law or rules should be made. Banks are different from other businesses. After last year’s financial crisis, it has become even clearer than before that once financial institutions get too big, they cannot be allowed to fail. In India, the practical reality that has emerged over the post-Independence period is that no commercial bank is allowed to fail and, when a bank has been seen to be in difficulty, the RBI has organised a forced marriage with a stronger bank. There can be no question that the RBI must retain this power to act in this fashion, with the necessary speed, when it perceives systemic turbulence emerging from the weakness of a particular bank. The most that can be said in favour of a role for the Competition Commission is a post facto reference to examine the issue from the competition angle, but once the deed has been done there is no practical way in which it can be undone. So, even a post facto review would serve little purpose. In theory, the Competition Commission could have the power to undo a bank merger if it finds that it has produced anti-competitive results. But this is simply not a realistic proposition.
There might however be a case for viewing crisis action as being different from strategic mergers and acquisitions. If banks are not allowed to fail, they come close to being utilities which need much greater supervision than ordinary companies, and such supervision is already a fact of life. But if an entire industry is populated by such semi-utilities, the matter of ensuring competition for the greater good of the customer becomes relevant. In this context, it is necessary to look at the issue of consolidation among public sector banks, supported by the finance ministry for long but held in abeyance mainly because of the opposition of the trade unions. If such mergers are not crisis-driven, should they be referred to the Competition Commission first? The Commission can be guided by the fact that in mature sectors in developed countries there is intense competition even if the space is dominated by fewer than half a dozen players. So any targeting of absolute numbers in terms of players and market share should be avoided.
Since the 1990s, a strong dose of competition has been introduced by the new private banks. Many customer-centric improvements plus the large scale introduction of information technology by public sector banks have come in response to the rapid growth of private banks with their superior customer service and product offerings. So the view can be taken that mergers to promote consolidation, as different from those mandated in order to ward off a crisis, can be referred to the Competition Commission for prior approval, and the latter would be expected not to adopt a mechanistic approach.
