Jairam Ramesh, the Congress politician, has criticised mergers and acquisitions (M&As) in the banking sector for years. This time, his gripe is that foreign banks are surreptitiously and openly gobbling up Indian banks. His angst is related to the immediate news that a bank in the United Arab Emirates is keen to pick up a stake in RBL Bank. Earlier, the State Bank of India (SBI) sold a part of its stake in Yes Bank to Japan’s Sumitomo Mitsui Banking Corporation. There were deals that involved the DBS Group, and Fairfax. Ramesh included a historical twist. More than 50 years ago, Jan Sangh, which was a precursor to the BJP, had taken Prime Minister Indira Gandhi to task, when she nationalised the Indian banks, but left the foreign banks alone. Today, the BJP seemed to tilt towards the foreigners. “Foreign firms are gradually being allowed to acquire Indian banks. These imprudent moves pose substantial risks,” Ramesh tweeted.
At the same time, the central Government has rejuvenated its old idea of mergers between public sector banks to create a mega bank that can compete with the largest in the world. Its latest idea, which may fructify by 2026-27, is to combine some of the smaller banks, dubbed the targeted banks, such as Indian Overseas Bank, Central Bank, Bank of India, and Bank of Maharashtra, with a large bank (anchor bank) like SBI, Punjab National Bank, and Bank of Baroda. The rationale is a decade-old one: Have fewer, but larger and stronger state-owned banks with better capital. There are rumours that the finance ministry may announce such a mega merger during the next year’s Union Budget. In the recent past, private banks like HDFC and ICICI have moved into the list of top global banks. While the former is among the top 10 largest banks, the latter is among the top 25 list in terms of market capitalisation.
In 2019, Finance Minister Nirmala Sitharaman announced that 10 state-owned banks would be merged to form four bigger ones. This followed the earlier decision to consolidate SBI’s subsidiaries with the parent, and join Bank of Baroda with Dena Bank, and Vijaya Bank. The four new banks that were envisaged in 2019 allowed Punjab National Bank to digest Oriental Bank, and United Bank. Canara Bank was merged with Syndicate Bank. The Union Bank got hold of Andhra Bank and Corporation Bank. Indian Bank was merged with Allahabad Bank. The rationale then was the same as in 2025: Create global-sized banks to improve operational efficiency, strengthen balance sheets, and enhance credit capacity. The idea is to have banks that can compete globally with the best in the sector. The M&As among state-owned entities may be indirectly linked to a renewed entry of foreign banks, which increases competition.
According to data compiled by Bloomberg, merger deals worth $15 billion involving foreign banks were struck this year. More, as Ramesh said, and media reports indicate are in the offing. The exuberance in India is contrary to what is happening in the US, where there were collapses. In addition, foreign banks have not had a great track record in India, and had struggled with the shadow banking crisis a decade ago. Suddenly, there is an appetite for Indian banks. Japanese banks have consistently talked about acquiring assets in India, and deep-pocketed Middle East ones are eyeing expansion. Europe too has joined the race. Media reports indicate that the Indian policy-makers wish to attract more foreign investment in the banking sector, and explore options to make it easier for the foreigners to even buy stakes in state-owned banks. However, diluting government stakes is still a political dynamite.
There are more issues to grapple with. Indian policy-makers need to understand that mere mergers are no guarantee to achieve the objective of creating global-sized banks. The past mergers have resulted in bigger balance sheets, and aggregate numbers, but failed to realise the synergies that enable a combined entity to become stronger and powerful. It is when the hidden values, not just financial but operational, are unleashed that a bank gets the size and confidence to compete with the best in the world. At the same time, only size does not matter. The future does. If the government controls the decision-making process, despite claims of autonomy, the banks are unlikely to take legitimate risks, and be embroiled in controversies like crony capitalism. Services are essential. There is a vast difference among public sector and private banks on issues related to customers’ interfaces. If clients, either retail or corporate, remain unhappy, a bigger bank does not translate into a better one.
In the past, the main aim, despite public claims, of the bank mergers was to save the weak banks, or force the stronger and larger entity to babysit the smaller ones. The idea was not to add to the strengths but reduce the inherent weaknesses. In some cases, the M&As were dictated by failures, or rather attempts to save a failed bank. This was true when SBI took over Yes Bank, and is now in the process of selling the stake, and profit from it. Hence, if India does decide to opt for even fancier mergers, it needs to have a vision, mission, and a future roadmap. Merely joining two entities is not enough. There needs to be a thought process of which bank to be combined with which one so that the ingrained synergies are realised.
