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Top 10 Banks' Contribution to Total Credit
Feb 17, 2017

Two big headlines about the banking sector today:

Cabinet approval for the merger of State Bank of India with its five associates.

The potential merger of Kotak Mahindra Bank and Axis Bank.

These are the first tangible signs of India's banking sector moving towards consolidation.

But why is it important? Take a look at the market share of the top public and private sector players in the industry. It is very fragmented to say the least. The largest bank in the country, SBI, has less than 20% share and there are several smaller players. A host of new banks that have fetched licenses recently have a fraction of the share.

Of the 46 commercial banks, only two figure among the world's 100 largest banks. The top 10 banks contribute around 60% share of the total credit.

Rising bad loans and poor credit offtake have marred have marred the performance of most banks for several quarters now. Niche NBFCs, on the other hand, have cannibalized on the market share of bigger banks, due to their unwillingness to lend.

In addition, banks need to invest in technology and automation to adapt their risk controls to digital payments. Such investments are practically impossible for the smaller players in the sector and expose them to huge risks. Consolidation of the banking sector is therefore inevitable.

It is not the banks with the biggest balance sheets that we are looking forward to. But if entities with complementary strengths come together, it would be a huge positive for the sector as a whole. Some temporary pain in swallowing the bad assets, however, cannot be ruled out.

Data Source: RBI, Annual Reports

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