Consolidation in Indian Banking sector: Pros & Cons

India’s largest lender State Bank of India (SBI) formally started merger of 5 associative banks and Bharatiya Mahila Bank with itself. The merged entity will have India’s one-fourth of the deposit and loan market.

Post-consolidation, SBI’s market share will increase from 17 per cent to 22.5-23 per cent, while the total business of the merged entity will be over 35 lakh crore rupees.
Against this backdrop, it is pertinent to analyse pros and cons of consolidation in the Indian banking sector.

Arguments in favour of consolidation

• India is the fastest growing major economy in the world. To sustain this growth, there is a need for mega banks that only will ensure investments into the large scale infrastructure projects.

• At present, there are a total of 27 public sector banks (PSBs) in the country. Apart from the SBI, all the remaining banks are regional banks. Hence, consolidation helps in leveraging the benefits of economies of scale.

• Banking sector is suffering from non performing assets (NPAs) problem. To overcome this, the government is resorting to capital infusion. Consolidation will increase capital efficiency, apart from improving the ability of banks to recover bad loans.

• Consolidation will help in leveraging the synergies among the banks that have diverse portfolios, focus areas and coverage areas.

• As the government is the only common owner of all the PSBs, the process of consolidation is much easier and effortless.

• Indian companies are going global. Now we are home to many multinational companies that have presence in various sectors of the economy. Again this context, big-ticket Indian banks are the most proper platforms to deliver financial services to them.

• At present, there is not a single Indian bank in the top 50 global banks list. The consolidation is expected to fill this gap, and, consequently, help build the ‘Brand India’ among international investors.

• International experience is also favourable towards consolidation. Banks in Japan gained a lot as a result of large scale merger and acquisition process between 1990 and 2004.

Arguments against consolidation

• Experts argue that consolidation should take place in a positive environment. The present process of consolidation is not driven by the inherent strength of the banking system. It is resorted to escape from the problem of NPAs.

• There are apprehensions among the labour unions that the consolidation will lead to job losses.

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