Big Banks

Context:

Union Finance Minister Nirmala Sitharaman said the Centre is holding discussions with the lenders and the Reserve Bank of India (RBI) for creating a ‘lot of big and world-class banks.

UPSC Relevance:

Indian economy, banking system.

PYQ:

Q. With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements: [2024]

1. There is no minimum capital requirements for wholly owned banking subsidiaries in India.

2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.

Which of the following Statement is Correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Global Status of Indian Banks

• Improved Financial Health: Indian banks have demonstrated a remarkable recovery from past stress, with improved asset quality, net interest margins, and credit growth, making them “far more mature” than a decade ago, according to the RBI Governor.
• Global Ranking: Several Indian banks feature among the top global and Asia-Pacific lists, primarily based on market capitalization:
  • HDFC Bank, ICICI Bank, and the State Bank of India (SBI) are often cited among the top 25 global banks by market capitalization. For instance, in late 2024 data, HDFC Bank, ICICI Bank, and SBI ranked 13th, 19th, and 24th, respectively, globally by market cap.
  • In a ranking by assets in the Asia-Pacific region, SBI, HDFC Bank, and ICICI Bank were included in the top 50.
• Focus on ‘World-Class’ Banks: The Indian government is actively pursuing the creation of more large, “world-class banks,” which may involve further consultation with the RBI and possible future consolidation or mergers.
• International Hub Development: Initiatives like the International Financial Services Centre (IFSC) in GIFT City are working to increase the global financial activities of Indian banks, including evaluating transactions in offshore currencies like the Renminbi (CNH).

Large Banks in India

• HDFC Bank is the largest by market capitalization, and also a leader in terms of total assets following its merger with HDFC Ltd.
• State Bank of India (SBI) is generally considered the largest bank in India by total assets and overall size.

Need for Consolidation:

• PSBs are fragmented, especially in comparison with other key economies.
• The merger will enable the government to pay closer operational attention to the enlarged institution.
• To protect the financial system and depositors’ money.
• To build capacity to meet credit demand and sustain economic growth.
• The need to bridge geographical gaps.
• In 1991 Narasimhan Committee suggested that India should have fewer but stronger PSBs.

 Positives:

• Capital will be higher when merged together and will give a feeling of a stronger bank.
• Large banks with larger lending capacity.
• It will provide efficiencies of scale and help improve the quality of corporate governance for the banks.
• Improvement in operational efficiency.
• Cost of funds for the merged entity is expected to come down.
• Bigger banks can attract more Current Account, Savings Account (CASA) deposits.
• Banks will have the capacity to raise resources without depending on the State exchequer.
• Improve the capacity of the banking system to absorb shocks that the markets may cause to it.
• Technical inefficiency is one of the main factors responsible for banking crisis. The scale of inefficiency is more in case of small banks. Hence, merger would be good.
• Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
• This will also end the unhealthy and intense competition going on even among public sector banks as of now. In the global market, the Indian banks will gain greater recognition and higher rating.
• The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
• The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
• Mergers make sure there is common unifying messaging.

 Challenges:

• Merger will affect regional flavour and end regional focus.
• The argument that size is going to determine the future of the bank in a globalised scenario is facile. Remember the fate of large global banks, which collapsed during the global financial crisis? On the contrary, small banks have survived the crisis due to their nimbleness and the niche areas they operate in.
• Immediate negative impact would be from pension liability provisions (due to different employee benefit structures) and harmonisation of accounting policies for bad loans recognition.
• There are many problems to adjust top leadership in institutions and the unions.
• Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
• The weaknesses of the small banks may get transferred to the bigger bank also.
• New power centres will emerge in the changed environment. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
• When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
• Also, India right now needs more banking competition rather than more banking consolidation. In other words, it needs more banks rather than fewer banks. This does not mean that there should be a fetish about small-scale lending operations, but to know that large banks are not necessarily better banks.
• Integration of technology platforms and cultures of these organisations.
• The quantum of Gross NPA (GNPA) cannot change and will still have to be addressed.
• Mergers are not the panacea in the context of PSBs

 What should be ensured by the government?

• The government shall not have any hidden political agenda, in bank mergers.
• All stakeholders are taken into confidence, before the merger exercise is started.
• After mergers, shares of public sector banks shall not be sold to foreign banks, foreign institutions and Indian corporate entities, beyond certain limit.
• Whenever further divestment (dilution of government holdings) takes place, the government shareholdings shall not fall below 51% under any This will ensure that the ownership and control of public sector banks remain with the government.
• The central government shall not rush through the process of bank mergers.
• The decision with regard to selection of smaller/weaker banks for merger with larger/stronger banks is to be taken carefully and grouping of various banks for this purpose is the key issue involved. The government shall not yield to pressure from any political or social groups.
• The acquiring bank shall not attempt to dominate or subsume the acquired bank. Good aspects of both the banks before merger shall be combined, in order to instil confidence in all stakeholders and to produce better results.
• Personnel absorbed from the smaller bank shall undergo brief, intermittent training programs to get acquainted with the philosophies, processes and technology in the new environment. The management must be ready with a good roadmap for this and allot considerable budgetary resources for this purpose.
• There shall be conscious and organized efforts to synthesize the differing organizational cultures, for the mergers to yield the desired results.

 Conclusion:

• Over the years economy has grown steadily, banking reforms have been steady and now it is the time for transformative change.
• Merger is a good idea but should be carried out with right banks for right reasons.
• Without addressing the governance issues in the banks, merging two or three public sector banks may not change the architecture.
• Need proper management structure and selection of impactful CEO’s.
• Merger only doesn’t improve performance matrix, it should happen with the package of many other things like having additional capital.
• For economic growth to happen huge companies need credit and capital so actually mergers should have happened few years earlier.
• Piecemeal consolidation will not provide a lasting solution and what is required is an integrated approach from all stakeholders including the government.