First, the good news.
State Bank of India, or SBI, the country’s largest lender, has moved up the ladder in global rankings. According to the list of the top 1,000 banks in the world, carried in the July issue of The Banker, a Financial Times publication, based on its tier I capital, or equity and reserves, for the fiscal year ended March 2008, SBI is the world’s 57th largest bank. In the previous year, SBI was 70th and the year before, 107th. Similarly, in terms of assets, SBI is now the world’s 70th largest bank, up from 80th in the pervious year and 84th in 2006.
ICICI Bank Ltd, India’s largest private sector lender, moved down a few notches. Based on tier I capital, ICICI Bank is now the world’s 150th biggest bank, four notches below its 146th rank in 2007. Based on assets, ICICI Bank’s world ranking is 148th, from 179th earlier.
Now the bad news. None of the other Indian banks features among the top 200 banks in the world—both in terms of tier I capital and assets. Punjab National Bank, the second largest government-owned bank in India, is 250th in terms of tier I capital and 256th in terms of assets.
HDFC Bank Ltd, the second largest private sector lender, is 219th, based on tier I capital but 274th when it comes to assets. Among the top 25 Asian banks, there is only one Indian lender—SBI, at 8th place. ICICI Bank was among the top 25 Asian banks in 2007 but it’s not there this year. China continues to dominate the list, occupying the first three slots and eight of the top 25 ranks. It is followed by South Korea with seven slots, Australia with four and Singapore with three.
Industrial and Commercial Bank of China, or ICBC, the biggest Asian bank and the world’s eighth biggest bank, is four times bigger than SBI, both in terms of tier I capital as well as assets. ICBC accounts for about 80% of India’s banking industry. This is despite the fabulous growth that local banks have enjoyed in the past few years. Riding high on low interest rates and plenty of liquidity, the Indian banking industry’s assets grew by around 30% for three years in a row between 2004 and 2007 as consumers in the world’s second fastest growing economy borrowed to buy houses and cars.
The message from the list of the world’s top 1,000 banks is clear: Its time for consolidation in the Indian banking industry. Local banks will have to build the scale to survive and grow. The US witnessed this phase in the 1980s and ’90s. Between 1980 and 1997, more than 7,200 banks were merged in the US, involving $1.81 trillion worth of assets. Following these mergers, the number of insured commercial banks in the US declined from 12,342 to 7,122 during this period. In those 17 years, as many as 1,454 insured commercial banks failed and 18,289 bank branches were closed.
The trend in Europe around that time was not very different. A report on consolidation that covered a group of 10 nations and Australia and Spain between 1990 and 1999, shows the number of bank mergers rose from 324 in 1990 to 887 in 1999. During those years, more than 7,300 bank mergers took place across Europe, involving assets worth $1.62 trillion.
The Indian context is different as very few mergers have taken place to build scale and most of them have been crafted by the banking regulator to safeguard depositors’ interest. If a bank fails, depositors lose money and only up to Rs1 lakh deposit carries an insurance cover.
Since 1961, there have been 77 bank mergers and most of them took place before the Indian government nationalized the first set of private banks in 1969. Post nationalization, there have been 31 mergers and most of them were rescue acts by the regulator.
Old private banks have traditionally been the soft underbelly of the Indian banking system. To take care of that, the Reserve Bank of India, or RBI, had a few years ago directed all of them to have at least Rs300 crore of equity and reserves and a widely held shareholding pattern. This has forced a few old private banks to merge with others and promoters to pare their holdings. Meanwhile, the regulator has also focused on other players in the banking space. For instance, a few non-banking finance companies as well as housing finance companies have been merged with banks. The number of regional rural banks has declined from 196 in 2006 to 91 in 2008. Many of these banks, set up in 1976 to push rural credit, turned unviable and their losses were mounting till RBI stepped in and forced their mergers. Similarly, the fall of a Gujarat-based large cooperative bank in 2001 and another in Andhra Pradesh in 2002, triggered a consolidation drive in urban cooperative banks. Governed by the provisions of cooperative societies act, these banks are subject to dual control by the state governments as well as RBI. The banking regulator has been able to bring down their number from 1,926 in 2004 to 1,793 in August 2007 by forming a task force and involving state governments.
Consolidation in the commercial banking sector is the toughest task as it is not possible without a political consensus. The Left parties, till recently allied to the coalition government at the Centre, are known for their ideological stance against banking consolidation as they feel mergers lead to job losses. After their exit, it’s time to give a big push for consolidation as scale improves the risk taking ability and soundness of the banking system.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to firstname.lastname@example.org