Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Towards bank cartelization in India?

I have begun to wonder whether Indian banks have stopped competing aggressively with each other and have started forming an implicit cartel. Rising non performing assets have reduced the appetite for bank lending to a level even lower than the severely depressed demand for bank credit. Obviously, banks do not need to raise much deposits if they are not lending much. It is easier (at least in the short run) to try and charge higher fees from a smaller depositor base than to spend time and money acquiring and retaining customers. And that is what we are seeing. More ominously, some of the attempts to raise fees and user charges seem to a casual observer to be coordinated across banks. If that is the case, then of course these are serious issues for the Competition Commission.

I think demonetization has played some role in this for multiple reasons. First, it boosted the liquidity of the banks virtually overnight and accelerated trends that had been building up slowly over several months. Second, demonetization turned banks into an extended arm of the state: bank officers became quasi government officials with substantial powers. Long after that stage passed, many banks have not gone back to being service organizations again. Anecdotal evidence suggests that this transformation from customer service to bureaucratic conduct has happened in the private sector banks to the same if not a greater extent.

In the long run, this change in the behaviour of the management and employees of the banks would be disastrous for the banking system. On the deposit side, payment banks and mutual funds might find a once in a lifetime opportunity to disrupt banking. On the advances side, non bank finance companies have gained valuable customers turned away by the banks. In the long run, the bond markets could also take business away from the banks.

The first 25 years of economic reforms saw the banking system grow to dominate the financial system previously dominated by the development financial institutions. Shortsighted management and staff could erode this dominance very quickly.

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3 responses to “Towards bank cartelization in India?

  1. Pingback: Towards bank cartelization in India? | Mostly Economics

  2. roseash20 March 18, 2017 at 12:45 pm

    What will be the remedies in such a scenario? Can the Competition Commission really take on the banks just like that?

  3. Ruchi Jain March 21, 2017 at 12:00 am

    The increase in charges is usually on a quasi co-ordinated level in most of the competitive industries. Nobody raises them unless one starts in the fear of losing customers.
    I think the aspect of depressed demand for credit, increased cost of credit (higher NPAs), increased personal liability of the officers also are equally responsible.

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