Indian Banking Sector and Large Global Scale Banks Debate

The Indian banking sector has remained stable despite global financial turmoil in 2025. While some stress was seen in non-performing assets, the conservative approach of the Reserve Bank of India helped maintain sector resilience. Recently, discussions have emerged about creating large Indian banks comparable to global giants. This debate is driven by the belief that bigger banks could better fund economic growth and help India reach a $7.3 trillion economy by 2030. However, current credit demand and market conditions suggest caution.

Global Banking Giants and Their Scale

The world’s largest banks are mostly state-backed or politically driven entities. Chinese banks dominate the top ranks with Industrial and Commercial Bank of China leading with assets of $22 trillion. The US, UK, France, and Japan also feature in the top ten. These banks have massive assets often linked to government support or high market risk exposure.

Position of Indian Banks Globally

Only State Bank of India (SBI) and HDFC Bank appear in the top 100 global banks by assets. SBI ranks 43rd with $846 billion in assets, and HDFC Bank is 73rd with $494 billion. The combined assets of Indian scheduled commercial banks total $3.38 trillion, about half the size of China’s largest bank. This illustrates the relatively smaller scale of Indian banks on the global stage.

Public Sector Bank Consolidation

India consolidated 27 public sector banks into 12 in 2020 to create stronger entities. While consolidation can improve governance and efficiency, merging all PSU banks would still place the bank only 18th globally by assets. Cultural differences and workforce resistance pose challenges. Fiscal constraints and limited deposit growth also restrict large bank creation through government support.

Demand for Large Banks – Is It Justified?

Credit demand from industry has been weak. Loans to industry dropped from 39.5% of bank credit in 2016 to 21.5% in 2025. Retail credit has risen in contrast. Companies prefer non-bank finance like bonds, internal accruals, and external borrowings. This diversification reduces risk concentration in banks and strengthens capital markets.

Infrastructure and M&A Financing

Infrastructure financing involves long-term risks unsuitable for commercial banks. The National Bank for Financing Infrastructure Development (NBFID) was created in 2021 to fill this gap, sanctioning ₹2.03 lakh crore by March 2025. Mergers and acquisitions (M&A) deal values average ₹3.7 lakh crore annually, manageable with current banking assets. Hence, large banks are not critical for these sectors now.

Risks of Large Bank Creation

Creating global-scale banks may increase systemic risks. Increased foreign or corporate ownership could introduce governance challenges. Asset-liability mismatches and long gestation periods in infrastructure projects raise concerns. The Indian banking system’s current conservative model helps maintain stability amid global uncertainties.

Future Outlook

While larger banks may seem attractive for global stature, India’s current economic and financial environment does not demand immediate creation of such entities. Strengthening existing banks, improving governance, and supporting non-bank financial institutions may be more effective.

Questions for UPSC:

1. Point out the challenges and benefits of public sector bank consolidation in India with suitable examples.
2. Critically analyse the role of development financial institutions in infrastructure financing and their impact on the economy.
3. Estimate the implications of increasing non-bank sources of finance on the stability of the Indian banking sector.
4. What are the systemic risks posed by creating very large global banks? How can regulatory frameworks mitigate these risks?

Answer Hints:

1. Point out the challenges and benefits of public sector bank consolidation in India with suitable examples.

1. Benefits include improved governance, operational efficiencies, and stronger balance sheets (e.g., consolidation from 27 to 12 PSBs in 2020).
2. Consolidation can create banks with greater lending capacity and better risk management.
3. Challenges include cultural differences, employee resistance, and integration difficulties across merged entities.
4. Fiscal constraints limit government’s ability to support large-scale mergers through capital infusion.
5. Even merged PSU banks may remain smaller than global giants, limiting global competitiveness.
6. Improved customer service and product offerings can result from consolidation but require effective change management.

2. Critically analyse the role of development financial institutions in infrastructure financing and their impact on the economy.

1. Development financial institutions (DFIs) like NBFID provide long-term finance suited for infrastructure projects with long gestation periods.
2. DFIs access global multilateral funds, reducing pressure on commercial banks and mitigating asset-liability mismatches.
3. They help catalyse infrastructure growth, which is critical for economic development and job creation.
4. By specializing in infrastructure finance, DFIs manage sector-specific risks better than commercial banks.
5. Impact includes improved infrastructure quality, enhanced connectivity, and support for sustainable growth sectors.
6. However, DFIs need strong governance and risk assessment to avoid non-performing assets accumulation.

3. Estimate the implications of increasing non-bank sources of finance on the stability of the Indian banking sector.

1. Non-bank finance (bonds, internal accruals, external commercial borrowings) reduces concentration risk in banks.
2. Diversifies corporate funding sources, lowering dependence on bank credit and improving financial sector resilience.
3. Boosts development of capital markets, enhancing liquidity and investment options.
4. Can lead to improved credit allocation efficiency and innovation in financial products.
5. Potential risks include regulatory arbitrage and oversight gaps between banking and non-banking sectors.
6. Overall, a balanced growth of non-bank finance strengthens the stability and depth of the financial system.

4. What are the systemic risks posed by creating very large global banks? How can regulatory frameworks mitigate these risks?

1. Very large banks increase systemic risk due to too big to fail status, leading to moral hazard.
2. They may have complex interconnectedness, amplifying contagion in financial crises.
3. Asset-liability mismatches and exposure to market risks can threaten financial stability.
4. Excessive government backing or political influence may encourage risky behavior.
5. Regulatory mitigation includes higher capital and liquidity requirements, stringent supervision, and resolution planning.
6. Global coordination among regulators (e.g., Basel norms) is essential to manage cross-border risks effectively.