- Former Deputy Governor of the Reserve Bank of India, M Rajeshwar Rao, pointed out that we currently have around 1,457 cooperative banks.
- While there are a significant number of smaller urban cooperative banks (UCBs), their contribution to total deposits is quite minimal.
- In the realm of non-banking financial companies (NBFCs), he noted that out of approximately 9,300, only about 300 are managing to maintain a healthy level of debt, highlighting the pressing need for consolidation.
- He emphasized that any consolidation process for UCBs should be voluntary.
- Rao stressed that as India aspires to become a much larger economy, the financial sector must grow at a pace that matches, or even exceeds, the growth of the real sector to ensure meaningful financial inclusion for all citizens.
Former Deputy Governor of the Reserve Bank of India, M Rajeshwar Rao, pointed out that we currently have around 1,457 cooperative banks. While there are a significant number of smaller urban cooperative banks (UCBs), their contribution to total deposits is quite minimal. In the realm of non-banking financial companies (NBFCs), he noted that out of approximately 9,300, only about 300 are managing to maintain a healthy level of debt, highlighting the pressing need for consolidation. He emphasized that any consolidation process for UCBs should be voluntary.
Rao stressed that as India aspires to become a much larger economy, the financial sector must grow at a pace that matches, or even exceeds, the growth of the real sector to ensure meaningful financial inclusion for all citizens.
He pointed out that scale and capital will be crucial for the future of financial intermediation. “We need robust players in the market, and to achieve this, we must not only have access to growth capital but also consider consolidation within the financial services industry,” he remarked during his address at the ASSOCHAM Banking Conclave in Mumbai on Wednesday.
Rao acknowledged that tackling the challenge of consolidation is essential. “In my view, addressing financial services consolidation upfront is vital for the future; size will indeed matter for financial service intermediaries.”
Regarding the fragmentation in UCBs and NBFCs, he mentioned, “As of the end of March, we had about 1,457 cooperative banks, with 838 in tier 1, which have deposits of less than Rs 100 crores. While there are many smaller UCBs, their share of total deposits remains low.”
He further explained that this situation hampers their competitiveness. “These banks struggle to compete and provide technology-driven banking services, and if they don’t adapt, they risk falling behind in the competitive landscape.”
Rao also mentioned that the consolidation of UCBs should be a voluntary process.
When it comes to NBFCs, he pointed out, “We have around 9,300 NBFCs, but only about 300 have sufficient debt; the rest are quite small,” highlighting the lack of scale in this sector.
Advocating for consolidation, Rao stated, “We might need fewer, but financially stronger and better-regulated entities, and we really need to plan for the challenges that come with consolidation in this area.”
Bank consolidation and capital challenges
The former RBI DG noted that the banking sector has already seen significant consolidation over the years. “If you look back, the number of public sector banks has dropped from 27 in 2000 to around 12 today.”
He also emphasized that capital will continue to be a constraint, especially for public sector banks. “For growth, capital is essential, and if these entities aren’t privatized, they will need government support.”
Regarding private banks, he mentioned that consolidation is generally easier due to more regulatory flexibility, although there are still challenges related to ownership and compliance.
Big Tech, fintechs and future competition
“Fintechs might find ways to enter the banking space, whether directly or indirectly, through licenses, digital-only banks, or by investing in traditional banks, becoming key players alongside existing banks and non-banks in providing financial services.”
He concluded by saying that banks will increasingly need to function within a broader ecosystem. “Banks will have to work as part of a larger ecosystem that includes a wider range of non-bank players,” he added.