India's big bank moment has arrived. Why it matters

Core Perspective - India's ambition to create at least two globally competitive banks among the world's top 20 aligns with its broader developmental goals, particularly the "Viksit Bharat 2047" roadmap, which envisions an economy capable of financing its own transformation [1][12] Group 1: Banking Landscape and Consolidation - India's banking landscape has been characterized by fragmentation, with numerous public sector banks (PSBs) operating with overlapping mandates [2][13] - The government's consolidation drive in 2020 reduced the number of state-owned banks from 27 to 12, aiming to create institutions with stronger balance sheets and broader reach [2][13] - The current consolidation effort may merge stronger, mid-sized PSBs into larger entities to build globally resilient institutions [13] Group 2: Importance of Scale - The scale of financial institutions is crucial for funding large-scale projects, managing risks, and influencing markets [5][12] - India's largest lender, the State Bank of India (SBI), has assets of around USD 846 billion, ranking 43rd globally, and would need to triple its balance sheet to break into the top 10 [13] - Large banks are better positioned to support multi-billion-dollar infrastructure projects and raise capital on favorable terms in international markets [13] Group 3: Reform and Modernization - Experts emphasize that mergers alone cannot create world-class banks; reforms in governance, human resources, and technology are essential [5][12] - Successful mega-banks must modernize through digital transformation, data-driven lending, and advanced risk management systems [6][12] - The government's proposal to raise the foreign investment limit in PSBs from 20% to 49% aims to improve access to international capital and attract long-term strategic investors [7][8] Group 4: Challenges and Considerations - The ambition to create large banks raises questions about enhancing profitability, governance, and service quality, as larger balance sheets do not guarantee better banking [9][10] - Merging large institutions involves complex integration challenges, including technology systems and corporate cultures [11][12] - There is a risk of creating "too big to fail" institutions, which could heighten systemic vulnerability if not managed prudently [11][12] Group 5: Potential Rewards - A handful of globally strong Indian banks could champion the country's international trade, infrastructure finance, and digital banking leadership [12] - With a stronger capital base and better access to foreign markets, these banks could help Indian firms expand globally while providing the domestic economy with the necessary credit depth [12]