Why Bigger Isn't Necessarily Better For India’s Public Sector Banks — In This Economy

India saw its retail inflation drop to an all-time low of 0.25% in October. This was supported by sharp deflation in vegetable prices, weak prices of cereals and pulses, and a large base effect coming into play. Economists believe that a large uptick in gold prices aside, India was already seeing trends of price rise turning negative. Wholesale-price indexed inflation too was in the negative zone at -1.2%, compared with 0.1% in September. The next logical question is if the central bank will take the lead and cut rates next month. Economists say the call is not so easy to predict. Gross domestic product growth is expected to continue to push 7% levels, which go against the case for a rapid rate cut. Soumyakanti Ghosh of SBI Research believes that an inflation-targeting central bank's job is to first cut when inflation dips. We'll keep a close watch over what happens in December.

On to this week's newsletter!

Do Public Sector Banks Need Consolidation?

While addressing the audience at an event in Mumbai on Nov. 6, Union Finance Minister Nirmala Sitharaman said that the government is in talks with the RBI and banks to create large, world-class banks. The FM's comments came amidst a lot of source-based reporting which suggested that a plan was being put in place to merge state-owned banks in India.

If materialised, this would be the second major consolidation exercise in recent years, with the last one being concluded in 2020. At that time, 26 public sector banks were cut to 11, with large mergers such as Bank of Baroda, Dena Bank and Vijaya Bank. Other mergers included Punjab National Bank, United Bank of India and Oriental Bank of Commerce; Union Bank of India, Andhra Bank and Corporation Bank and Indian Bank with Allahabad Bank.

One could argue that these banks have actually had a decent run since the massive merger spree. The Covid-19 period gave them a major liquidity boost and the resultant retail finance boom put these lenders on an even stronger footing. The RBI's timely intervention on unsecured credit further boosted the case for public sector banks, as their private peers had to quickly pivot to a secured credit model. 

But the question is if they need that same treatment now. The main argument in favour of it is that India needs large, world-class banks. This is yet to truly materialise. State Bank of India, the largest of all banks in India, reached the Rs 100 trillion business-mark only in the September quarter of this fiscal. The next two large banks in line are both private sector lenders, which are significantly smaller. 

Public sector banks are still in their growth phase, with cleaner balance sheets and more effective strategies. Burdening the management with merger work may not be the most effective use of resources for now.

For all the talk of India's massive credit market potential, the one fact that banks have realised is that the addressable market might be much smaller. Yes, more people are now in organised work, there is more digital data available now than at any point in the last decade, we also have incredibly better digital finance options now. But still, most of India's prestigious lenders lend to the same set of borrowers. The pie has definitely grown, but mostly in the crusty bits where the biggest lenders don't really want to splurge.

The other major issue with this merger strategy is controls. 

Are India's banking laws and regulations ready to handle multiple super-banks? Currently, India's systemically important banks list has remained unchanged with only the top three featuring in it. With the creation of these world class, supersized banks, that list may need to change. With them comes the need for tighter supervision and improved monitoring.

Food for thought.

Feature Five

- First tranche of the India-US trade deal is nearing closure now, Rishabh reports.

- Noida-based Signodrive to deploy 4,000 Gensol EVs across Delhi-NCR, Bengaluru — Agnidev's newsbreak confirmed.

- Since Sunday, Mumbai has seen severe disruption in the supply of compressed natural gas owing to damage to a key gas pipeline

- Mahanagar Gas Ltd's Ashu Singhal tells Soumeet Sarkar that the disrupted CNG supply would be restored by Tuesday. 

- Anil Ambani has skipped summons from the Enforcement Directorate a second time. The first time around, the ED had rejected his plea to appear through video conferencing, Shrimi reports

Caught My Eye

SS Rajamouli has found himself at the receiving end of the ire of his more god-fearing audiences. A self-professed atheist himself, Rajamouli was annoyed with the tech glitches at a teaser launch event for his next mega movie, Varanasi. While talking to the people at the event, he made some references to Hanuman, which eventually irked a lot of people on the internet. And as expected, this went very poorly for the ace director.