Experts urge that policy makers in India must aim a banking system that facilitates economic growth and driving financial inclusion.
They feel that having very few large banks should not be the intention of policy makers while giving licenses. This comes amid recent comments by Union Finance Minister P Chidambaram that he wants more large banks in the country.
According to experts, global experiences suggest that as banks get ambitious, they tend to lend aggressively and diversify into risky businesses such as investment banking. But when the tide shifts, these actions begin to hurt the entire economy.
In recognition of the risks that larger banks pose, US President Barack Obama decided to give bank regulators the power to limit the size of the largest banks in his country, and the scope of their risk-taking activities.
He publicly endorsed the Volcker Rule in January 2010 to put limits on bank size and prohibit commercial banks from trading for their own accounts.
Subsequently, the Consumer Protection Act (or the Dodd-Frank Act) was signed into federal law in July 2010; it proposed a break-up of large banks which had become “too big to fail” to minimize the risks they pose to the economy.
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