Poonam Sharma
New Delhi: In the haste to consolidate and enlarge, the Indian banking industry seems to be following the same playbook adopted by the West not so long ago. The recent fervour surrounding the formation of larger banks—demonstrated by the SBI subsidiaries’ merger and calls for more integration—is being welcomed by most as the future direction. There are even predictions from experts that only five banks will remain in the future. But is “larger” really better?
The 2008 financial crisis in the world marked a moment of reckoning for the big banks. The so-called “too big to fail” concept went up in flames under the hammer of inefficiency, lack of personal touch, and systemic threat. But India appears to be moving in the opposite direction—towards an already discredited model by the West.
At the center of this ill-conceived fixation is a core misconception: size does not ensure efficiency, profitability, or customer satisfaction. With technology, banking no longer necessitates extensive branch networks or massive balance sheets in order to perform. Even tiny banks can be brought into national or international financial systems using digital platforms.
Banking, particularly in a country like India, is essentially a relationship-driven business. Knowing the customer’s business needs, sectoral trends, and local conditions is essential. Alas, our public sector banks fall short on this personal touch. Repeated transfers, lack of expertise, and bureaucratic red tape turn branch managers into mere administrative overseers. The consequence? Disconnection from local economies and the very clients they are supposed to serve.
This gap becomes more significant when we consider the foundation of India’s economy—proprietorships and partnership firms. They contribute almost 50% of our GDP, and in other industries like construction, trade, transport, and personal services, their contribution reaches 70–80%. However, their credit access from banks is disproportionately low.
In 1990, these non-corporate groups had 58% of the share of bank credit, whereas corporates had 30%. Corporates had raised their contribution to 40% by 2015, while the non-corps had dropped to 42%. This clearly indicates a change in bank priorities, reinforced by the falling proportion of small-ticket loans (less than ₹10 crore), which have fallen from 61% in 2005 to 46% in 2015. Non-banking sources—moneylenders, chit funds, and NBFCs—are supplying over half of the nation’s credit requirements.
Small and medium-sized enterprises (SMEs), particularly those in the unorganized sector, continue to expand at healthy real rates of 8% or higher per annum. But these are the very segments taking loans at usurious interest rates of 2–6% a month since they remain underserved by formal banking. Why? Because larger banks have turned system-centric. They evaluate risk through inflexible documentation, ratios, and standardized provisioning norms—without considering the variety of customer conduct and local cycles.
In these institutions, the link between customers and decision-makers is too long. Ironically, most of the big banks now charge the customer for “personal banking”—as if interaction with a person is a luxury, not an essential.
India requires not five global dream chasers in the guise of mega banks but hundreds of decentralized, smaller, and locally rooted banks. We require banks that sense the pulse of local economies and are ready to partner with young entrepreneurs in small towns and villages. Banks such as City Union Bank in Tamil Nadu, Federal Bank in Kerala, and TJSB Sahakari Bank in Maharashtra have demonstrated that regional banks can be cost-effective, quick to respond, and profitable.
The MUDRA initiative was in the right direction, but it should be institutionalized via a Parliamentary act. We have to mainstream informal credit providers and legalize local banking ecosystems instead of strangulating them with blanket regulations.
In this era of digital technology, when a cell phone can function as a branch of a bank, the mathematics of physical expansion is obsolete. Larger may not only be less required—it might be self-defeating. When technology makes banking more democratic, the most nimble and customer-centric institutions will triumph, not the largest ones.
India’s past has seen it copy unsuccessful models—earlier the Soviet model, currently the American one. Rather than borrowing big-bank ideologies from consultants and experts who are divorced from ground realities, we need to create our own way. The size fetish must yield to functionality, inclusion, and local sensitivity.
Ultimately, a bank is only worth as much as it can serve. And in Bharat, that service starts not in boardrooms, but in bazaars, workshops, and villages far from the metropolis. Let’s create a banking system that serves them—not one that reads well on paper.
The post The Illusion of Big Banks: Why Small Is Beautiful in Indian Banking appeared first on Global Governance News- Asia's First Bilingual News portal for Global News and Updates.
