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Can bigger banks lead to better credit growth?

Creation of bigger banks will lead to more financial muscle to participate in bigger loan deals but whether they can lead to increased credit flow on the ground is a matter of debate.

September 27, 2021 / 04:55 PM IST
Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman

On Sunday, Union finance minister Nirmala Sitharaman said India needs at least four or five banks of a size matching its biggest lender, the State Bank of India (SBI), to meet the growing needs of its economy.

The government initiated the merger of public sector banks (PSBs) to meet the new, changing and growing requirements of the economy, Sitharaman told an annual meeting of the Indian Banks' Association (IBA).

"The economy is shifting to a different plane altogether," she said. "Even before the pandemic, the driving force for amalgamation (of banks) was that India needs a lot more banks, a lot more big banks," she said.

Is the idea of creating big banks new?

Not really. As Sitharaman said, the government initiated and executed the mega merger plan of PSBs in 2019 to create bigger banks. In the process, the total number of PSBs came down to 12 from 27. According to this plan, Punjab National Bank (PNB) absorbed Oriental Bank of Commerce and United Bank, creating the second-largest bank after State Bank of India (SBI).


Similarly, Syndicate Bank merged with Canara Bank, and Union Bank of India absorbed both Andhra Bank and Corporation Bank. Also, Indian Bank took over Allahabad Bank.

What does consolidation among PSBs do to the banking industry?

Mergers among PSBs are more of a technical process as the ownership remains with the government. The government is the majority stakeholder in all PSBs. There is no fresh money coming in during such deals. Also, the technology used in these banks are largely based on the same platform and wages in PSBs are decided through negotiations between IBA and trade unions. Hence, the process of PSB mergers was largely a technical integration of these banks.

How is SBI positioned among global banks?

Even though SBI is the largest lender in India, it isn’t really in the ‘big league’ in the global banking industry. SBI is at the 57th rank with $638.49 billion (Rs 48.5 lakh crore) in assets, down from the 55th position last year. At the number one position is the Industrial & Commercial Bank of China, which has assets worth $5107.54 billion.

China dominates the list of the big banks in the world with the four top ones --— Industrial & Commercial Bank of China, China Construction Bank Corp, Agricultural Bank of China and Bank of China. They have a combined asset value of over $17 trillion. SBI is only Indian bank to feature in the top 100 list. SBI’s nearest rival is HDFC Bank, which has total assets of Rs 17.4 lakh crore. Other banks are way below.

Can creation of bigger banks lead to better credit flow?

There is no evidence to suggest that creation of bigger banks can lead to increased flow of credit on the ground. Credit flow is a function of the demand situation in the economy, availability of capital with individual banks and the asset quality situation.  In the Indian context, the mega merger exercise, which has resulted in consolidation, hasn’t led to an increase in bank credit, mainly because the demand situation on the ground remains muted.

In other words, the creation of bigger banks will lead to more financial muscle to participate in bigger loan deals but whether they can lead to more credit flow on the ground is a matter of debate.

Do bigger banks mean safer banks?

Again, to think, ‘bigger is safer’ is a misconception as we have seen during multiple economic crises, including the global financial crisis. Bigger banks have bigger capital requirements. Also, the failure of such entities will have large systemic implications. The RBI has categorised too-big-to-fail banks as systemically important entities.

However, the creation of a few big banks that can match the size of SBI will help introduce more competition and check large concentration of assets in one single financial entity.
Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: Sep 27, 2021 04:55 pm
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