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So enormous opportunities exist. India's financial sector is going to boom in a growing economy where millions of people will join the workforce and need bank accounts. Banks will, therefore, need to plan for all this and learn basic survival skills.
Globalization in the context of financial markets does not mean only acquiring the ability to protect their turfs when foreign banks invade India but also going abroad and competing in other markets. One useful prerequisite for that is size.

In terms of size and scale, the big Indian banks are pygmies. The combined assets of the five largest Indian banks - the State Bank of India, ICICI Bank, Punjab National Bank, Canara Bank and Bank of India - on March 31, 2003 were less than the assets of the largest Chinese bank, China Construction Bank, which is roughly 7.4 times the size of the State Bank of India. The Banker's list of the top 1000 banks of the world (July 2004) has 20 Indian banks. Only six of them come in the top 500 group. The State Bank is positioned 82nd, ICICI Bank 268th, Punjab National Bank 313th, Canara Bank 405th, Bank of Baroda 425th and Bank of India 474th. Even in the Asian context, only one Indian bank - State Bank of India - figures in the top 25 banks based on Tier I capital, even though Indian banks offer the highest average return on capital among Asian peers. No wonder the focus is on scale.

The net NPAs of Indian banks have dropped substantially over the last few years not on account of any dramatic improvement in the quality of assets or better credit appraisal and monitoring but because of huge provisioning. So in a rising interest rate scenario, banks will face a double whammy. In the absence of high treasury income, their profitability will be hit and they will not be able to make large provisions to bring down their net NPAs further. If they want to continue to make large provisions for NPAs, their profitability will be squeezed even more. So, the soft underbelly of the Indian banking system may once again be exposed as interest rates rise. By pushing consolidation and merging some of the weak banks with stronger ones the government is trying to create a situation where it does not need to dole out public money to bail out banks.

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* Contributed by -
Pritesh Y. Chothani, Ritesh Sud & Rachna Srivastava,
PGDBM 2006,
IMT, Ghaziabad.