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Day 27 – Q 3. What purpose does the merger of government owned banks and PSUs serve? Discuss. 

  • IASbaba
  • July 10, 2020
  • 0
GS 2, Indian Economy, TLP-UPSC Mains Answer Writing
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3. What purpose does the merger of government owned banks and PSUs serve? Discuss. 

सरकार के स्वामित्व वाले बैंकों और सार्वजनिक उपक्रमों के विलय का क्या उद्देश्य है? चर्चा करें।

Demand of the question:

It expects students to discuss the purpose behind merger of public sector banks. It also expects students to discuss both aspects of impact of merger of government owned banks and PSU’s.  

Introduction:

With the motive to  strengthen the banking sector, expand the national presence and global reach of these banks and PSU’s  government announced merger of 10 public sector lenders into four bigger and stronger banks. Earlier to this  the Oil & Natural Gas Corporation (ONGC) and Hindustan Petroleum Corporation Ltd (HPCL) merged together, resulted in ONGC buying up the 51% government stake in HPCL.

Body: 

As the merger came in to effect there are 12 PSUs – six merged banks and six independent public sector banks.

Purpose Behind the Merger Plan

  • Merger was proposed through a ministerial panel called “Alternative Mechanism”  headed by Finance Minister.
  • Economic Survey (2015-16) pointed out that constant failure of banks to lend credit to both emerging as well as existing industries has resulted in stagnation in the economic growth of the nation.
  • Economic Survey (2015-16) also pointed out that Problem of credit lending, based on the twin balance sheet crisis, can be checked by the formation of bigger banks.
  • To keep pace with the growing economy, there is a need for big banks that can lend to big industries & entrepreneurs that require large amounts of credit.
  • As per banks’ prudential norms, banks take risks only for those entities that are appropriate as per banks’ size. 
  • Banks usually avoid investing in a single entity or business. Also to protect weak PSBs from loss – thereby securing customers and financial system.
  • Hence to invest in large projects, banks with huge lending capacity were needed which can also lend to PSU’s.
  • Banks also need large credit, better customer service & connect in order to invest in mega projects through lending.
  • Larger banks can invest in standardizing these processes in larger set of customer-facing entities through technology up gradation, fraud detection, etc.
  • Bigger banks would also be able to adhere to BASEL III norms.
  • Bigger banks & large PSU’s with diverse portfolios have lesser chances of failure since it is unlikely that different sector of an economy will face a crisis at a same time.

Impact of Merger:

  • Large banks will have large balance sheets which can lend to different sectors of economy as per  need in turn lead to  growth of Indian economy.
  • The large banking entities & PSU’s will be able to absorb financial shocks better. It will also build capacity in PSBs to raise resources without depending on the state exchequer.
  • Consolidated banks will have a better ability to raise resources from the market.
  • Large PSU’s can work in synchronous with the government policies.
  • A synergistic relationship would efficiently use one another’s network, customer base, better managerial efficiency ,and it will also improve Operational Efficiency.
  • Stronger and globally competitive banks would provide increased choices to the stakeholders.
  • Because of consolidation capital allocation, performance assessment, and steering would become easier for the government.

Former RBI Governor has warned that while creating large banks one might end up with a big weak bank. Hence, challenges posed by these merger exercises can’t be blindsided:

  • There is a concern among employees that amalgamation may lead to rationalization of bank branches & employees.
  • The merger also sends out poor signals about banking & PSU’s governance  which will affect trust of customers in banking system.
  • A strong banks merger with a weaker and under-capitalized PSB would stall the bank’s recovery efforts as the weaknesses of one bank may get transferred and the merged entity may become weak.
  • Same scenario can be seen in PSU’s merger.
  • For instances, a weak Dena Bank (under Prompt Corrective Action) may impact stronger banks like Bank of Baroda & Vijaya Bank.
  • Bigger banks & PSU’s may monopolise market economy.

Conclusion:

Merged larger banks & PSU’s offer more resilience to the banking & PSU’s sector but blindsiding experts opinions like twin balance sheet problem, NPA’s ,and risk control system would not be helpful to give boost to banking & PSU’s sector. Hence, strong foundation of PSBs needed so that banking & public undertakings sector in Indian economy becomes strong enough to achieve the target of $5 trillion GDP  economy by 2024.

 

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