quality of services is too attractive to ignore. 5. it is also felt that a larger bank may be less risky than a smaller bank as the larger bank will have a more diversified portfolio resulting in less volatility in its earnings. consequently, a large bank may command higher credit rating than a smaller bank. in a march 2016 report, fitch rating agency mentioned following : “ more stable banking systems tend to be structured around a number of large'pillar'banking groups. these large banks in a consolidated banking system enjoy scale benefits leading to better diversification of risks and stronger overall profitability contributing to higher credit ratings. ” 6. large banks do benefit from economies of scale in terms of risk diversification, although this benefit disappears when banks become excessively large beyond a certain threshold size. this threshold size has been subject of much debate in the discipline of finance. however, there is no clear research which may point towards an optimum size for a bank in a particular country. perhaps in future, research will throw light on the optimum size of banks. however, in the context of india, it is felt that there is ample room for consolidation in the bis central bankers ’ speeches banking sector, especially among psbs without creating issues of moral hazard or too big to fail concerns. it does appear that the banking system in india is too fragmented at present. there is evidence, as measured by herfindahl - hirschmann index ( hhi ) for indian banking sector using square of on - balance sheet market share of all banks in the system which works out to be 518. 53. this indicates that our banking system is highly fragmented and diffused. in fact there is evidence which shows that this index has been falling over the years in india. 7. there are 48 domestic banks ( excluding rrbs and labs ) out of which there are 27 psbs having a market share of around 70 % in terms of asset size. a comparison of performance of larger psbs with smaller psbs does indicate that larger psbs perform better. for example, among all psbs, larger psbs like sbi and bank of baroda are trading at higher price to book value ratio in comparison to other smaller psbs. sbi has been able to maintain relatively strong capital ratios and appears to be in a better position to withstand shocks to asset - quality. this indicates that under indian conditions, there is lot of scope for banks to grow in size to become efficient and diversify their risks. 8.

build - up of all types of buffers. in an overarching sense, this approach is reflected in the accumulation of foreign exchange reserves which, as our experience has shown, has become our national safety net in the absence of a truly global financial shield. besides providing the wherewithal to protect our financial markets and institutions from being overwhelmed by global spillovers, the reserves have helped to build bulwarks of external strength, as reflected in modest external debt servicing and debt to gdp ratios. we believe that this is strengthening our capability to manage new challenges such as climate change and cyber threats while maintaining public confidence and ensuring the financing requirements of india's development strategy. thank you. 1 this includes 12 small finance banks, 6 payment banks, 2 local area banks and 43 regional rural banks. 6 / 7 bis - central bankers'speeches 2 2. 9 lakh crore in indian rupees. 3 national electronic fund transfer and real time gross settlement. 7 / 7 bis - central bankers'speeches