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The Union cabinet has given its nod to the merger of State Bank of India and its five subsidiaries. This will create a behemoth that will be more than three times bigger than the largest Indian private sector bank and one of the top 50 lenders in the world. This newspaper has highlighted the risks associated with the proposed merger in the past, as it ignores the lessons of the 2008 global financial crisis.
The Reserve Bank of India has rightly become more concerned about systemic risk and the merged entity will demand much greater regulatory attention. Further, possible efficiency gains after a forced merger should not be taken for granted. The merger of Indian Airlines with Air India continues to haunt the government. Creating a public sector lender of this size will also increase the ability of the government to influence outcomes in the market, which can have a bearing on allocation of capital. Besides, at this stage of development, rather than consolidation in the banking sector, India needs more competition.