Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty used a picturesque example to raise and answer an important question: What is the more pressing problem facing the Indian banking system— planned mergers or financial inclusion?

“If there is one sweet shop in Churchgate and one in Virar, the way ahead is not fewer sweet shops, but more of them along the way," he said in a speech last week. Churchgate and Virar are the two ends of one of Mumbai’s suburban train lines.

Illustration: Jayachandran / Mint

This remark was made at a time when there were a handful of newspaper stories that suggested that the government is keen to merge large public sector banks. Several official committees have recognized the need for such consolidation since the mid-1990s, but precious little has been done. The only significant bank mergers that India has seen in recent years have either been between private sector banks or when a public sector bank has been forced to swallow a struggling or scam-hit smaller bank.

The big problem with mergers of banking behemoths is that duplicate branches in the same area may have to be closed down. That is what Chakrabarty was evidently referring to in his remark about sweet shops. Should a country where six out of 10 citizens do not have a bank account be shutting down bank branches?

This is a complex debate. On the one hand, there is the global evidence that large banks are not necessarily strong banks (so bank consolidation is not as important as we thought), while, on the other hand, there is the possibility that technology rather than bank branches is a better vehicle for financial inclusion (so the 1970s style branch expansions are not the best way to reach the poorest). It is also doubtful that the choice between bank consolidation and financial inclusion is a Manichean one: black or white.

It is significant that RBI governor D. Subbarao did not mention the need for bank consolidation in the course of a speech he made in Mumbai on 25 November, when he put out his list of “four big challenges that Indian banks will need to address". The challenges that make it into his list were: financial inclusion, lending to infrastructure projects, risk management and improving efficiency.

Subbarao also shot down the idea that India should embrace “boring banking" when what is needed is “lateral thinking, entrepreneurship and management calibre—all a far cry from anything like boring".

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