The banking sector will reap the full benefits of competition only if the Reserve Bank of India restricts itself to framing of prudential norms for banks and leaves all other issues to market forces, according to the Competition Commission of India (CCI). The CCI is an autonomous body mandated by law to prevent cartelisation, abuse of dominance and ensure a level-playing field across all sectors in the economy.
If the RBI has to take note of CCIs suggestions, it will need to incorporate specific clauses in its regulations to prevent anti-competitive practices. Significantly, the CCI has suggested that public sector banks be not given any preference over the private sector ones. It has also pitched for greater operational freedom for private banks.
There still are several entry barriers in branch licensing and ATM licensing besides locational restrictions, which were leading to distortions in the market, leaving just a few private players in the sector. These distortions have only grown because of heavy investments by banks in government securities, leading to lazy banking, directed credit and cross-subsidisation of public sector banks.
The CCI has also asked the RBI that it be kept informed of instances of anti-competitive practices arising out of mergers and acquisitions in the sector as well as abuse of position by any big player. The move follows CCIs observation that the banking sector, despite considerable liberalisation, is still dominated by public sector banks that account for 75% of the market share.
The Organisation for Economic Cooperation and Development (OECD) had, in a study, pointed out that there was a need to clearly differentiate between enforcement of prudential regulation and general competition rules. If this suggestion were to be accepted, it would mean that, while the RBI would continue to be the sole regulator on setting prudential norms like the capital adequacy ratio, the competition issues relating to the industry would be closely tracked by the CCI.
The OECD also observed that foreign banks found it difficult to take over their Indian counterparts due to substantial state ownership of banks.