Letters: State of banks

With reference to "Taking stock of the state of the banking sector" (May 23), the State Bank of India (SBI) commands the largest total business (read deposits and advances) in India. It has dwarfed the leading private sector banks (HDFC Bank and ICICI Bank).

That brings us to the question of the size of a financial institution. Proponents of "big bank theory" argue that banks with larger balance sheets are more efficient users of capital. But this is a false hypothesis when we consider SBI's own capital matrix. The productivity of SBI's capital is quite low compared to its peers in the private sector.

Recently, it mooted a proposal to take over five of its associates and Bharatiya Mahila Bank with it,which would catapult it into the league of top 50 global banks. SBI has made a strong business case for the merger citing access to cheaper funds, synergies in business and treasury operations, branch rationalisation, etc.

The success of the merger depends upon SBI's ability to win over staff unions that have already protested against it. Further, there would be tricky integration issues. Big public sector banks would continue to suffer from poor lending decisions as they have not revisited their credit appraisal skills.

The leading private sector lender, HDFC Bank, does not figure in any consortium that has bad eggs in their basket. Today, the absence of any bank in a consortium is being talked about to assess the bank's credit decisions. Further, HDFC Bank is reported to have dropped a proposal to augment its capital that will further expand its balance sheet.

Private sector banks are not keen on increasing the size of their balance sheets. While scaling up in terms of deposits (part of total business) is not an issue, a corresponding risk arises in banking business to augment lending. Private sector lenders have realised this phenomenon and are therefore wary of expansion.

K V Rao, Bengaluru

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