Merger of Banks

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TOPIC: General Studies 3:

• Bank merger and issues related to it.
• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

In News: Finance minister Nirmala Sitharaman had announced the consolidation of 10 state-run lenders into four bigger banks. The merger announcement was followed by a move to infuse equity of Rs 55,250 crore in these banks to enable them grow their loan book. Instead of privatising some of these banks or bringing in strategic investors, the government decided that amalgamation is the “best route” to achieve banking sector scale and to support the target of achieving a $5-trillion economic size for India in five years

The earlier merger of Bank of Baroda, Vijaya Bank and Dena Bank led to enhanced customization and rationalization of operations without any retrenchment. CASA (current and savings account) growth is 6.9% in the June quarter; retail loan growth is 20.5%, while profitability is around ₹710 crore.

• PNB, Oriental Bank of Commerce (OBC) and United Bank of India (UBI) will be merged to form the second-largest state-run bank in the country, with a business of ₹17.95 trillion (loans plus deposits) and will be at least 1.5 times that of PNB.
• The other merger will be between Canara Bank and Syndicate Bank, which will make the fourth-largest bank, with ₹15.2 trillion business.
• Also, Union Bank will be merged with Andhra Bank and Corporation Bank to build India’s fifth-largest public sector bank with ₹14.59 trillion in business.
• Indian Bank will be merged with Allahabad Bank to make India’s seventh-largest PSB with a business of ₹8.08 trillion.

India’s PSB count has now come down from 27 in 2017 to 12. 

Logic behind the Merger

The government’s move to merger state-owned banks aims to cut operational costs and achieve global scale to support fresh investments, revive growth and meet the National Democratic Alliance’s (NDA’s) target to become a $5 trillion economy in the next five years.

The proposed mergers of public sector banks initiated by the government will be a win-win for the account holders as they will be able to avail benefit from the best practices of all three lenders. The mergers should help create stronger institutions thereby leading to efficiencies of scale and stronger balance sheets. 

Large banks will entail cost advantages by way of economies of scale such as centralised back office processing, elimination of branch overlap, eliminating redundancies in administrative infrastructure, better manpower planning, optimum funds management, and savings in IT and other fixed costs. Large banks will also be able to finance large projects on their own even while staying within the prudential lending norms imposed by the regulator.

Some of the concerns

Integration of information technology platforms: Integration of technology platform is a crucial factor towards merger of any bank. Punjab National Bank (PNB) currently uses software Finacle 10, while the two other banks use Finacle 7.

Management attention and bandwidth of the entities being merged could get split impacting the loan growth and reduce focus on strengthening asset quality in the short term.

Unlikely to revive credit flow: The merger of 10 public sector banks (PSBs) into four entities is unlikely to revive credit growth or have meaningful cost synergies, said a report by Credit Suisse. The merger is also unlikely to meaningfully revive the flow of credit to the liquidity pressed non-banking financial companies (NBFCs) as given the already high share of NBFC exposure in constituent banks, all four merged entities will have more than 10% of their loan exposure towards NBFCs.

Too big to fail: The financial sector is all inter-connected and a risk in any part of the system is a risk to the entire system. If a large bank were to fail, it could bring down the whole financial sector with it, as was evident from the near death experience following the collapse of Lehman Brothers in 2008, which triggered the global financial crisis. No country can therefore afford the failure of a big bank. The tacit knowledge that the sovereign will be forced to rescue it encourages irresponsible behaviour by big banks.

The administrative and logistic challenges of mergers might end up diverting the mind space of bank managements away from their most pressing task at the moment — of managing the NPAs and aggressively looking for lending opportunities.

Conclusion: We will become a $5-trillion economy not by growing at our current potential growth rate but by raising it. That requires structural reforms. Structural measures will take time to work their way through the system. 

Connecting the Dots:

1. The origin of PSU banking in India was political through an ordinance, its evolution has been political and its future will perhaps be determined by political and economic considerations. Discuss.
2. The nexus between businessmen and politicians is based on a classic exchange of favours: The former help the latter to get access to credit in return for funds for election campaigns. Comment.
3. What are the structural reforms that the Government needs to take to ensure that India reaches the $5-trillion mark? Enumerate.