India's banking sector has long been considered a laggard in relation to the country's hugely successful economy, and this year's Top 1000 Banks ranking shines a new and unflattering light on the true extent of India's malaise.
Especially revealing is the ranking for the top 25 Asian banks excluding China. Even in the absence of China, India only has three banks in the listing, just one more than when Chinese banks are included. Banks from Malaysia, Singapore, South Korea, Taiwan and Thailand effectively crowd out Indian players.
India also disappoints when ranked against its peers in the BRIC economies of Brazil, Russia, India and China. With a paltry share of both aggregate Tier 1 capital and assets, India's banks are in many ways comparable to those of Russia - an economy promising half India's rate of growth for 2010 and with just a tenth of India's population.
Market-watchers have long lamented the highly fragmented state of the Indian banking sector, which is populated by some 80 commercial banks and more than 100,000 regional co-operatives and credit unions.
Throughout the past decade, the Reserve Bank of India has repeatedly urged the industry to consolidate, but its pleas have largely fallen on deaf ears - especially at the country's public sector banks.
The latter, which account for some 70% of the Indian banking system, are often highly unionised, making consolidation - and the consequential job losses - an extremely sensitive issue. Last year, for example, employees at state-owned Bank of Indore repeatedly threatened to strike in order to stall the bank's proposed merger with State Bank of India - its parent company, no less.
Limiting opportunities
But the ongoing fragmentation of India's banking sector may limit job opportunities for everyone. As Chanda Kochhar, CEO of ICICI Bank, the country's second largest institution, observes on page 86, the Indian banking sector needs to grow at twice the rate of the broader economy if it is to adequately support and help realise the country's extraordinary economic prospects. More specifically, India needs strong local champions with global scale that are able to provide the depth of funding that large Indian companies currently seek from international banks.
If India's banks cannot step up, the country's economic growth - and in turn the employment prospects of hundreds of millions of Indians subsisting beneath the international poverty line - will suffer. Now is the time for India's Ministry of Finance to grasp the nettle and force consolidation - however loud the protests.
