Tuesday, June 23, 2009
Growth of Banks
It is unfortunate but true that growth sometimes becomes the only strategic focus of an organisation. Is there something like the optimal size for a commercial bank? Intuitively one may say that the optimal size will be a function of internal constraints / facilitators and external factors. Reducing this to a regression analysis will be a theoretician's delight.In our country, debate about optimal size has been waxing and waning. For example. in early 1970s, private banks tended to avoid the deposit threshold of Rs.50 crore fearing that crossing that limit would attract nationalisation. (e.g.the then Vysya Bank Ltd.)Banking reforms post-Narasimham committee reports emboldened bank managers to feel "the bigger,the merrier". The Basel norms which are implemented more rigidly in India have changed the mindset of risk managers in banks. They are now confident that tier-1 and tier-2 capitals are both steroid and antibiotic promoting growth and preventing contagion.Unfortunately, they are also a diuretic creating unforeseen liquidity problems. A few years back, Mr.P.Chidambaram tried to encourage the "merge and grow" culture hoping that growth per se will take care of many banking ills.