Source: The post “Do we really need large banks now?” has been created, based on “Do we really need large banks now?” published in “The Hindu BusinessLine” on 22 November 2025. Do we really need large banks now?
UPSC Syllabus: GS Paper 2- Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.
Context: The Indian banking sector has remained stable even during global financial disturbances due to the Reserve Bank of India’s conservative regulatory approach. In this context, the debate on whether India needs global-scale banks has resurfaced as the economy aspires to expand rapidly.
Why the Demand for Large Banks Has Emerged
1. Perception of Funding Constraints: Some stakeholders believe India lacks sufficiently large banks that can finance major private-sector expansion, mergers, acquisitions, and global-scale operations.
2. Poor Global Ranking of Indian Banks: Indian banks rank relatively low on global asset-size rankings, prompting suggestions that India needs much larger banks to support its ambition of becoming a $7.3 trillion economy by 2030.
Global Scenario: How Large Banks Were Formed
1. Government-Created Banking Giants: Many of the world’s largest banks were deliberately built through government policies or substantial exposure to market risks to serve strategic national interests.
2. Dominance of Chinese Banks: Chinese banks such as ICBC, Agricultural Bank of China, China Construction Bank, and Bank of China hold a combined asset size of $22 trillion, reflecting their state-supported scale.
Position of Indian Banks Today
1. Global Ranking of Indian Banks: Only SBI (rank 43) and HDFC Bank (rank 73) appear in the list of top global banks.
2. Asset Size Gap: The total assets of all Indian Scheduled Commercial Banks amount to $3.38 trillion, which is nearly half the size of a single Chinese bank like ICBC.
Feasibility of Creating Large Banks in India
1. Limits of PSU Bank Consolidation: Consolidation of public-sector banks from 27 to 12 has strengthened the system, but even merging all PSU banks would create a bank ranked only 18th globally. Such mergers face cultural, structural, and employee-related resistance.
2. Risks of Higher Foreign or Corporate Ownership: Allowing greater corporate or foreign ownership in banks raises governance and systemic-risk concerns.
3. Limited Room for Deposit Growth: With Indian households already depositing most of their savings in banks, expanding the deposit base to create mega-banks is difficult.
Do Large Banks Match Current Economic Needs?
1. Weak Industrial Credit Demand: Industrial credit growth has slowed, with its share dropping from 39.5% in 2016 to 21.5% in 2025.
2. Shift Toward Retail Lending: Banks rely increasingly on retail credit, which has grown from 22% to 33% of total lending over the same period.
3. Low Private-Sector Capex: Private-sector capital investment remains subdued except in select sectors like renewables and chemicals.
4. Growth of Non-Bank Funding Sources: Companies are increasingly using internal accruals, corporate bond markets, and external commercial borrowings, reducing the dependence on banks.
5. Unsuitability of Banks for Infrastructure Lending: Infrastructure projects create asset–liability mismatches for banks and add long-term risks, making specialised institutions like NaBFID better suited for such financing.
6. M&A Financing Is Manageable: The average annual M&A deal value of ₹3.7 lakh crore during 2019–2024 can be easily financed with the current banking capacity.
Challenges in Creating Large Global Banks in India
1. Governance and Management Complexity: Creating mega-banks increases administrative complexity and may dilute accountability, making governance more difficult.
2. Risk Concentration: Large banks may lead to higher systemic risk, where the failure of one institution could destabilise the entire financial system.
3. Integration Difficulties: Merging banks with different cultures and technological systems creates operational disruption and affects employee morale.
4. Fiscal Constraints: The government lacks sufficient fiscal space to recapitalise very large banks without compromising other developmental priorities.
5. Technological and Cybersecurity Risks: Larger institutions become more attractive targets for cyberattacks and may face greater challenges in integrating digital platforms.
6. Regulatory Challenges: Supervising mega-banks becomes more complex and demands significantly stronger regulatory capacity.
Way Forward
1. Encourage Targeted PSU Bank Consolidation: Consolidation should continue but with a focus on operational efficiency, stronger governance, and improved customer service rather than global rankings.
2. Strengthen Development Finance Institutions (DFIs): Institutions like NaBFID should be strengthened to handle infrastructure financing, reducing the burden on commercial banks.
3. Deepen Corporate Bond Markets: India should expand bond markets to meet corporate financing needs, reducing reliance on banks and diversifying funding sources.
4. Promote Digital and Technological Capacity: Banks must invest in advanced technology, cybersecurity, and AI-driven decision systems to improve efficiency without necessarily increasing size.
5. Enhance Risk Management Practices: Strengthening risk monitoring, stress-testing, and governance systems can improve safety and performance.
6. Focus on Financial Inclusion and Credit Access: Expanding credit to small businesses, agriculture, and underserved sectors can generate more real economic value than creating globally large banks.
7. Maintain a Stable and Diverse Banking Ecosystem: India should aim for a balanced mix of public-sector banks, private banks, small finance banks, and fintech-driven models rather than only mega-banks.
Conclusion: While India may eventually need larger banks to support global ambitions, the current economic realities do not demand the creation of huge global-scale banks. Strengthening governance, expanding capital markets, improving credit allocation, and empowering DFIs provide a more sustainable path. Stability, efficiency, and resilience must remain the core priorities of India’s banking system rather than size alone.
Question: “The Indian economy needs efficient and resilient banks, not necessarily larger banks.” Comment in light of the debate on forming global-scale banks in India.
