Modi’s mega bank merger: Indian lenders still dwarfs on global stage; only one bank among top 100

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Updated: September 9, 2019 6:03:30 PM

Despite three rounds of merger & consolidation, India's largest public-sector bank will remain India's only entry in top 100 banks of the world for years.

Top 10 bank in India, Top 100 bank in worldThe government has merged 6 public sector banks with 4 larger banks.

PSU Bank Merger: Modi government’s decision to merge 6 public sector banks with 4 larger banks may not be enough to provide the kind of scale and size the government is looking for to achieve the rapid economic growth witnessed in other parts of Asia. The rapid growth witnessed in other Asian economies like China, South Korea, Taiwan, Malaysia and Indonesia were funded by the financial muscle of their banks. Chinese banks played a crucial role in the sustained double-digit growth of the country for nearly three decades, the same is true with other Asian Tigers. Size of the bank balance sheet is important to fund large infrastructure project as it reflects a bank’s risk appetite during the periods of slowdown. However, despite consolidation and merger among the public sector banks in the last two years, SBI is the only Indian bank among the top 100 banks of the world. The situation will not change with the merger and amalgamation of 10 banks into four PSU banks and SBI will remain India’s lone entry in the list for several years.

Consolidation of India’s public sector banks that was set in motion by Prime Minister Modi in his first term will eventually reduce the number of public sector banks from 27 in 2017 to 12 by 2020. The government said that it was necessary to make the country a $5 trillion economy in the next five years. But it has ruled out any further consolidation in the near future.

The decision is aimed at increasing the risk appetite of public sector banks so that they can undertake bigger projects due to economy of scale. It is also aimed at increasing their operational efficiency and cost-cutting through branch rationalisation. However, a comparison with global peers would reveal that despite the country becoming the 5th largest economy in terms of real GDP and third largest in terms of relative purchasing power or purchasing power parity (PPP), India’s banks are nowhere in the global stage or even among the Asian banks.

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SBI is a giant among Indian public and private sector banks with assets in excess of Rs 52 lakh crore. After the recent round of consolidation, it will be remotely followed by PNB (Rs 18 lakh crore), Bank of Baroda (Rs 16.1 lakh crore), Canara Bank (Rs 15.2 lakh crore) and Union Bank India (Rs 14.6 lakh crore).

India’s largest bank a dwarf on the global stage

SBI may be a giant among Indian banks but it is not more than a dwarf on the world stage which is dominated by Chinese, American, Japanese and European banks.

Four Chinese banks – Industrial and Commercial Bank of China, China Construction Bank, Agriculture Bank of China and China Bank Ltd occupy the top four slots in the top 10 banks in the same order with a combined asset base of nearly $14 trillion. These Chinese giants are followed by Japan’s Mitsubishi UFJ Financial Group ($2.8 trillion) and America’s largest bank JP Morgan Chase ($2.53 trillion).

While India has only one bank among the top 100 banks in the world – SBI which is at the 55th spot with assets worth $535 billion, China has 18 and US has 11 banks in the list of top 100. These two largest economies of the world are followed by Japan that has 9 banks in the top 100 and UK and Korea that have 6 banks each.

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In case of Asia, the list is again dominated by Chinese banks that occupy 21 slots among the top 50 Asian banks followed by Japan which has 8, South Korea 6 and Australia and Taiwan have 4 each.

Even a tiny island like Singapore is ahead of India. It has 3 banks among the top 50 Asian banks followed by India which has just two banks – SBI and HDFC in the list of top 50 Asian banks.

Despite a large number of public and private sector banks in the country, Indian banks lack the size or financial muscle that the country needs to achieve and sustain a high rate of economic growth.

In addition to this, public sector banks are also saddled with the problem of non-performing assets (NPA), making them dependent on the government for capital infusion. Bad loans of public sector banks have been estimated at Rs 8.06 lakh crore in March this year. In recent years, the government has infused Rs 2.7 lakh crore in public sector banks under its recapitalisation programme. However, despite these measures, the GDP growth rate came down to just 5% in the first quarter of this fiscal causing concerns among the policy circles.

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Following China model may help

Banking Industry experts suggest that India should follow the Chinese model of having four-five mega-banks to cater to the specific sectors of the economy. China’s Industrial and Commercial Development Bank (ICBC) is the world’s largest bank with assets worth $4 trillion, catering to the requirement of Chinese industry and trade.

World’s second-largest bank, China Construction Bank, with the assets worth $3.4 trillion, is aimed at funding massive Chinese investment in the infrastructure sector including President Xi Jinping’s favourite Road and Belt Initiative.

Agricultural Bank of China, which is the world’s third-largest bank with assets worth $3.2 trillion, is dedicated to meet the funding needs of the agriculture sector. Banking experts suggest that India may also follow the Chinese model of having 4-5 mega public sector banks to meet the sector-specific funding requirements.

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