Experts have since long called for consolidation of public sector banks in India to create bigger banks. But this has not made any headway despite various reports advocating merger of various small public sector banks. The recent merger of Kotak Mahindra Bank and ING Vysya Bank has brought back the focus on consolidation in the Indian Banking Sector.

Recently our Prime Minister Mr. Narendra Modi called for the need to establish Indian banks that rank among the Top 10 in the world. PM Mr. Modi said that “the banking sector of a country mirrors its economic rise. Japan and China had banks in the top ten banks of the world during their economic rise.”

However, the fact is that even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by Tier I capital – a core measure of a bank’s financial strength that consists largely of shareholders’ capital. Similarly, in terms of assets, India’s largest bank, SBI is now the world’s 70th largest bank. On the other hand, ICICI Bank Ltd, the largest private sector lender has attained the 148th position. None of the other Indian banks features among the top 200 banks in the world in terms of the size of assets.

History of mergers & acquisitions in Indian banking industry:

In the last one-and-a-half decade, there have been only a dozen bank mergers in India. But no deal involved two large banks; either two mid-sized banks would merge or one large lender would acquire a much smaller bank going through difficult times. For instance, state-run Oriental Bank of Commerce acquired Global Trust Bank in 2004 while HDFC Bank took over Centurion Bank of Punjab in 2008. The recent merger of Kotak Mahindra Bank, a new generation private-sector lender, and ING Vysya Bank, an old private-sector lender, follows the same pattern as both are of similar size.

Why India needs more bank marriages:

The issue of consolidation in the banking sector has assumed significance considering the following:

• Funding of Infrastructure Projects
• Meeting Capital Adequacy Norms
• Catering to Global Needs
• To keep pace with the Economic Growth
• To become Competitive

There can be no two opinions about the fact that no Indian bank is of a global size. State Bank of India (SBI), the country’s largest lender, is nowhere close to the world’s largest lenders. Bank of America is almost six times its size. Another problem of the Indian banking system is that after SBI there is a huge drop in size; ICICI Bank, the second-largest lender, is one-third the size of SBI in terms of total assets.

The large size of projects India is talking of needs larger sized banks to finance it. The need for two or three world-sized banks in an economy that is poised to become one among the five largest in the world is rather obvious and clearly the only way Indian banks can expand rapidly and reach global size is through consolidation.

Financial Services

Further, mergers were needed not just for achieving economies of scale but also for the survival of small banks, which would find it increasingly difficult to operate with the entry of new private sector banks, who being nimble footed have a clear advantage over public sector banks in growing their business inorganically. Among the public sector banks, State Bank of India has been merging smaller banks into itself. But there is still enough room for public sector players to consolidate themselves.


The Lehman crisis, however, revealed the problems of big banks, which have to be saved in a crisis as they are too big to fail and can rock the economy. Ireland is the best example of how an economy collapsed trying to prevent a big bank collapse. Ireland provided extensive financial support to its large banks but had to seek financial assistance from the EU and the IMF in 2010.

Coming to India, one reason why bank consolidation has not happened at a rapid pace is opposition from bank employees and unions, which fears there might be cultural issues when two different banks are brought together and overlapping branches would have to be closed and consolidation would not make sense until duplication in branches, people and infrastructure were removed. Also, different technology platforms are being used by various banks and that would have to be kept in mind while merging two banks.

Further, smaller banks play an important role in the supply of credit to small enterprises and agriculture and providing banking services in unbanked and under-banked regions in the country.

Also, a country like ours where a large percentage of the population do not have bank account first needs to focus on financial inclusion. Consolidation will benefit only if large scale branch closure is carried out & financial inclusion is possible only if a number of branches are opened in rural areas. The Indian scenario is full of contradiction and under the circumstances, we have to co-exist with both.


Hampered by the fragmented nature of the Indian banking system and the small size of the typical bank, Indian banks are not able to compete globally in terms of fund mobilization, credit disbursal, investment and rendering of financial services. They say the RBI’s differentiated licensing is the way forward. The RBI’s decision to set up specialty banks like Payment Banks, Wholesale Investment Banks, and Wholesale Consumer Banks will take banking services to a whole new customer set. Further, the ‘Pradhan Mantri Jan Dhan Yojana’ has facilitated the opening of more than 11 crore bank accounts and this has to some extent solved the problem of financial inclusion by bringing the unbanked into the banking fold. The general consensus is that more bank mergers may be inevitable in order to enable banks to play on a larger stage. India needs to slowly but surely move from a regime of a large number of small banks to a small number of large banks.

Main Contributions : Akshay Rathod.

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