Be wary of expansion based on complex risks: Gokarn to banks

‘There is no unambiguous relationship between scale and efficiency’

The Reserve Bank of India (RBI) on Thursday said large banks can be extremely vulnerable if expansion strategies are based on taking a complex array of risks.

While discussing the issue of determinants of competitiveness at a Ficci-IBA banking seminar, RBI Deputy Governor Subir Gokarn said, “In the Indian context, there is substantial evidence that there is no unambiguous relationship between scale and efficiency or performance (of banks).”

He cited examples of China and India, saying the former had banks that were many times the size of Indian banks in terms of balance sheets. But, he said, this did not apparently lead to a significant difference in efficiency and performance indicators between the two.

“Scale may matter, but is not by itself enough to guarantee the desired outcome,” he said, adding that the achievement of scale that substantially increases the riskiness of the asset base may prove to be counter-productive.

Financial inclusion
Gokarn also sought to allay bankers’ concern on financial inclusion targets. Banks have been instructed to establish a presence in all unbanked villages having a population of at least 2,000 people.

“There is an inherent reluctance on the part of banks to service certain client segments because they are not (thought) commercially viable. However, more recent thinking and evidence on this issue suggests that commercial viability is not unachievable, given an appropriate mix of organisational structure, human resources and technology,” he said.

Adding: “A combination of regulatory mandates, implicit and explicit subsidies and moral suasion has been brought to bear on the financial system in pursuit of this objective.”

A recent report by The Boston Consulting Group said government banks were not very confident of doing the task in a profitable manner and argued that such an activity should be done through a separate business unit.

“The current business model of a commercial bank has a cost structure that is economically unviable for rural markets. During the last decade, the total number of rural branches of commercial banks has dropped by 1.2 per cent,” the report had said.