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Starting this fiscal year on 1 April, five associate banks of the State Bank of India (SBI) and Bharatiya Mahila Bank were merged with SBI. Banker Uday Kotak is of the view that there will be strong consolidation in the sector and, eventually, only a few large banks will dominate. The government is also keen on further consolidation in the banking sector.
This newspaper has argued in the past that rather than consolidation, India needs more competition in the banking sector.
Interestingly, mergers and talk of further consolidation come at a time when the sector is struggling with a high level of non-performing assets with no clear solution in sight and is losing out to other sources of financing such as the bond market.
The possibility of a significant consolidation in the banking sector raises at least two important questions. First, will a small number of large banks not increase financial stability risk?
Second, will taxpayers be saved from bailing out state-owned banks in the future?