Banking Central | India’s big banks get bigger, gear up to take on global giants
Are bigger banks good or bad? That’s subject of an old debate. To think, ‘bigger is safer’ is a misconception. We have enough evidence as seen during multiple economic crises.
HDFC Bank
India’s banking landscape is on a swing over the last three-four years, with the big banks getting bigger, though they are still far from the Chinese and American lending giants in terms of asset size.
The merger of the country’s oldest mortgage lender, Housing Development Finance Corporation, with its twin HDFC Bank, that came into effect on July 1, marking another milestone in the evolution of the Indian banking industry. The merger gives birth to a behemoth with combined advances of Rs 22.2 lakh crore. HDFC contributed Rs 6.2 lakh crore to the merged corpus.
The combined entity is only second to the country’s largest lender State Bank of India (SBI) which has a loan book around Rs 33 lakh crore. HDFC Bank is now hogging the limelight in the global banking arena with its combined equity market capitalisation making it the fourth largest in the world, only behind JPMorgan Chase & Co, Industrial and Commercial Bank of China and Bank of America Corp, according to a Bloomberg report.
With HDFC-HDFC Bank merger now a reality, India is raising its count of big banks with sizeable asset size that can compete with their global peers. Bigger banks can participate in bigger loan deals globally as part of the consortium lending to major private corporations. That also aligns with the plan of the Narendra Modi government which wants at least four to five lenders of the size of the State Bank of India.
The consolidation of 10 state-run banks and the ongoing consolidation in the private sector are in a way aiding a silent transformation in the Indian banking landscape. Having done two rounds of bank consolidation earlier, the central government in 2019 decided to merge six disparate and weak PSBs into four in one stroke.
Accordingly, Punjab National Bank (PNB) took over Oriental Bank of Commerce and United Bank of India; Allahabad Bank became part of Indian Bank; Canara Bank subsumed Syndicate Bank; and Andhra Bank and Corporation Bank merged with Union Bank of India. Earlier, SBI had merged five of its associate lenders with itself, while Vijaya Bank and Dena Bank were merged with Bank of Baroda. In the private sector, ICICI Bank, Kotak and Axis Bank are already big names, while others are catching up fast.
Are bigger banks good or bad for the country’s banking system? Well, that’s subject of an old debate. To think, ‘bigger is safer’ is a misconception as we have seen during multiple economic crises, including during the recent US banking crisis. Bigger banks have bigger capital requirements. Also, the failure of such entities will have large systemic implications. The RBI has categorised too-big-to-fail banks as systemically important entities for a reason. As Indian banks become even bigger, the central bank has a case to be more vigilant.
Banking Central is a weekly column that keeps a close watch and connects the dots about the sector’s most important events for readers.
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