India wants bigger banks to match global giants—But size alone doesn’t assure better outcomes
Small is beautiful, said German-born British economist, E.F. Schumacher, in the early 1970s. But not in the world of banking. Or so it would seem, going by comments of home minister Amit Shah and, lately, finance minister Nirmala Sitharaman on increasing the size, including possibly through consolidation, of public sector banks (PSBs).
The desire to see more Indian banks enter the ranks of top global banks is understandable. Much like the desire to see India move up the rankings in the league of the world’s largest economies. In both cases, it is, no doubt, a matter of great pride.
What matters more is where we stand in per capita income terms and the quality of life in the case of economic size; in the case of size of banks, it is how effectively and efficiently they are able to meet the needs of the public and ensure financial inclusion. In neither case is size alone a guarantee of that.
As our experience of not one but two large waves of consolidation—first when the Bharatiya Mahila Bank and the associate banks of State Bank of India (SBI) were merged with the parent in 2017 and then in 2020, when a series of mergers among PSBs saw their number come down from 27 to 12—has shown, consolidation in itself is no magic wand.
Currently, only two Indian banks—SBI and HDFC Bank—feature in the top 100 global banks by total assets, a far cry from Chinese and US banks, which dominate the top 10 global banks lists.
India’s largest bank, SBI, figures at number 43 in S&P Global’s Annual list of World’s Largest Banks released in April, with assets of $846 billion. For it to break into the top 10, it would need to triple in size.
The current number 10 is Japan’s Mitsubishi UFJ Financial with a loan book of $2.6 trillion. That won’t be easy given the disparate sizes of our economies.
More importantly, should that be an overarching goal at all? The argument of those batting for large banks seems to be that they will be better able to fund infrastructure projects of the kind India needs and meet the credit needs of big corporates.
But this isn’t correct. If anything, banks should not be in the business of financing infrastructure projects given the inherent asset-liability mismatch in such lending. Bank deposits are payable on demand. Hence, banks are best suited to extend working capital finance, not long-term finance that the infrastructure sector needs, as evidenced by the misadventure of the early 2000s when banks lent heavily to it.
As for the credit needs of large corporates, the rapid development of the financial sector during the past few years has meant that we are no longer as bank-reliant an economy as before. Corporate bonds, equities (witness the deluge of initial public offerings), company fixed deposits and external commercial borrowings now offer a viable alternative to bank loans. In any case, large-sized loans to corporates should not be extended by a single bank, but usually through a system of consortium lending.
Contrary to received wisdom, large banks are not necessarily fail-proof. Worse, unlike smaller banks that can be allowed to go under without governments being compelled to rush to their aid with taxpayer money, large banks are often regarded as too big to fail since the failure of a single bank, if large enough, could have a domino effect and imperil the entire financial system as well as the economy.
The bottom line is that mergers should be driven by commercial considerations, not fiat.
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