The government’s ambitious desire to consolidate banks because it wants at least two big Indian banks to be able to compete globally is near fulfilment with the proposed merger of the five subsidiaries of the State Bank of India with SBI. The State Bank of India, which was 52nd in the global ranking of banks, will be catapulted into the top 50, at No. 45, when the merger is completed. China heads the global ranking with 11 big global banks compared to the US’ six, a far second. At the moment it is not clear whether all the five SBI subsidiaries will be merged with it in one go or in phases. But, with the government pushing it, it is only a matter of time. Whilst globally there is concern about big banks as they mean big risks following the failure of the big banks during the 2008 financial crisis triggered by the collapse of Lehman Brothers, India does not face the same problems. Indian banks are well regulated, unlike in the US where reforms of the financial system are still being fiercely resisted. Indian banks have to keep 21 per cent of their deposits as SLR, or statutory liquidity ratio, and four per cent as CRR, or cash reserve ratio, so deposits are safe. Besides, the public sector banks have government support, so they can never fail. This SBI merger leading to further mergers in remains only a distant possibility.
One of the main problems faced by the government and borrowers is funding for infrastructure projects and here behemoths like the SBI can be ideal lenders after the five subsidiaries merge with it. About three decades ago there was talk of merging the financial institutions in order to get the funds to finance big projects. But it never took off because of resistance from the unions and the Left. There was also resistance, and there still is, from the top brass of the banks who see their companies as fiefdoms. The situation has changed dramatically today and though there is resistance to the proposed merger of SBI’s affiliates by the unions, which have called for a strike on May 20, the merger will go through.
There is lot to be done regarding cleaning up of the balance sheets of the public sector banks. That process is underway under the supervision of RBI Governor Raghuram Rajan, who has the authority to make this happen. Once the banks are on their way to recovery, industry too will find it easier to get loans. Recent reports suggest that there are green shoots appearing in various sections of the economy, so funds will be needed.
