India’s banking sector could learn some useful lessons from Iceland’s strong showing in The Banker’s Top 1000 world banks.

The world is a curious place. An aficionado of The Banker’s Top 1000 listing may have noticed that Iceland, a country of less than 300,000 people, produced three banks in the leading 500 world banks while India, a giant with 3000 times the population, produced only six banks in the leading 500.

How does a country known mainly for fishing, tourism and volcanos produce three major banks while a country whose largest bank – State Bank of India, which has more employees than the entire population of Iceland – produces only six? The answers are revealing.

Realising that the “Blue Lagoon” was not quite enough of an attraction, Icelandic bankers have in recent years sought acquisitions abroad. Privatisations provided the banks with new zest and, undisturbed by foreign banks – of which Iceland has none – the Iceland big three have acquired a variety of Nordic and London institutions, catapulting them into the big league.

While India, likewise, is not dominated by foreign banks, the world’s largest democracy with an economy 50 times larger than Iceland’s has only managed to produce a relatively small number of large financial institutions by global standards.

Why has this happened? State ownership and bureaucracy are often seen as key barriers to the growth of India’s financial institutions. But the rapid growth of India’s second largest bank, ICICI Bank, through efficient management and clear strategy proves it can be done.

Iceland’s Kaupthing Bank, which would effectively be India’s third largest bank, has managed to avoid the hurdles of bureaucracy and achieve extraordinary growth on all fronts. It has also brought shareholder support along with it from a rich and concentrated Icelandic investor base.

But, unlike India, a limited domestic market in Iceland means that this year 80% of Kaupthing’s income will come from abroad. Can the management in Reykjavik keep a grip when the bulk of its assets are in 10 countries or more?

Tight and focused management has enabled the Icelandic banks, up to now, to fight far above their country’s economic weight. Indian banks, in contrast, are fighting well below. Iceland has also shown that it is not necessary to be a large country to produce large, successful banks. The question now is whether the ‘big three’ can continue to grow successfully abroad or be swallowed up.


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