Finance Minister of India has declared to merge 10 Public Sector Banks into 4 big banks (that has reduced the number of PSU to 12 from 27 of 2017) which is a big consolidation of public sector banks. Key Pronouncement of the Merger The scheme of amalgamation has led to the merger of the following banks:

  • Merger Number 1: Oriental Bank of Commerce (OBC) and United Bank of India (UBI) are merged with the Punjab National Bank (PNB).
  • Merger Number 2: Syndicate Bank is merged with the Canara Bank. And as of now, the Canara bank would be fourth largest Public Sector of India.
  • Merger Number 3: Andhra Bank and Corporation Bank are merged with Union Bank of India which makes Union Bank as the 5th largest PSU.
  • Merger Number 4: Indian Bank would be merged with the Allahabad Bank. And the merger will make Allahabad bank as 7th largest Public Sector Bank of India.

Other Pronouncement

  • Big Capital Infusion: On this big consolidation, the government of the Day also declared capital infusion totaling over ₹55,000 crore into public sector banks.
  • Improved Loan Tracking System: Loan tracking mechanism in PSU banks is being improved for the benefit of customers
  • Liquidity credit to NBFCs:4 NBFCs will now get liquidity support through PSU banks.
  • Better Management:
  • Non-official directors to perform role analogous to independent directors
  • Bank boards were given the flexibility to fix the sitting fee of independent directors
  • To make management accountable to the board, board committee of nationalized banks to appraise the performance of the general manager and above including managing director.
  • Post consolidation, boards will be given the flexibility to introduce chief general manager level as per business needs.

mega public sector bank merger Why the Move?

  • Reducing Risk Appetite: As per the ministry, the merger will make the banks to reduce risk appetite and will ensure a strong national presence.
  • Reducing the Cost Operation: This big consolidation of Public Sector Banks would reduce the cost of operations due to network overlaps.
  • Business enhancement: It will give impetus to the increase of the post-merger bank’s business by 2-4.5 times.
  • Increasing Global Competitiveness: This merger would ensure doubling the businesses of PSUs and that will further increase their global competitiveness.

Committees on Bank Merger

  • Narasimham committee: In 1991 and 198, Narasimham committee suggested a merger of strong banks both in public sector and even with the developmental financial institutions and NBFCs.
  • Khan committee: In 1997, Khan committee also stressed the need for harmonization of roles of commercial banks and the financial institutions.
  • Verma committee:  Verma committee report on Weak PSUs, has entailed the need of public sector bank consolidation that will further lead to pooling of strengths and lead to an overall reduction in the cost of operations.

Need to know about Bank Merger

What is a Bank Merger? 

  • It is a situation under which two or more banks pool their assets and liabilities to become one bank.

What is the regulation for Bank Merger?

  • Section 44A of the Banking Regulation Act 1949:It provides procedure for Amalgamation of Banking Companies, under which, no banking company shall be amalgamated with another banking company, unless a scheme containing the terms of such amalgamation has been placed in draft before the shareholders of each of the banking companies concerned separately, and approved by a resolution passed by a two-thirds majority of the shareholders of each of the said companies.
  • Section 45 of the Banking Regulation Act (Forced Mergers): Under these norms, RBI can apply to the Government for an order of moratorium for a banking company.

Benefits of the merger

  • Creation of a global level of Bank: The merger will increase the net assets and, that in turns, will lead to the joining of the league of top 50 banks globally in terms of assets.
  • Extending Outreach: A banking merger can help in extending the outreach of the Indian banking system to foreign countries.
  • Synergy effect: Merger will help in improving the efficiency of operations, increasing economies of scale, better management of risk, improved professional standards, savings on cost, etc.
  • Benefits to customers: More innovative products and services to customers like mutual funds, insurance products, etc. The increased capacity will also enhance the reach of banks to rural and ill-served areas.
  • Better portfolio management: The merged entity will be able to diversify its portfolio, better identification of willful defaulters and addressing the issue of NPAs.
  • BASEL norms Compliance: Big banks with their huge capital reserves will be able to meet BASEL III requirements more easily
  • Benefits to the economy: Due to higher capital base a merged entity will be able to finance long term and highly capital intensive infrastructure and other projects.

Concerns-Limitations of the merger

  • Diversion from specific objective: After unification, the subsidiary bank may forget their specific objective to serve a particular section or region.
  • Adverse impact on existing employees: Immediate job losses, high VRS liability, harmonization of skill sets, change in terms of service condition, etc.
  • Postponement of Promotion: Seniority related matters among mid-level employees may also become a concern as any pending promotions may now have to wait before the merger is fully completed.
  • Failure Risk: Failure of a large and merged bank will affect the economic health of the country severely especially at a time when PSBs are facing a higher level of NPAs.
  • The merger of technical and physical infrastructure: Harmonisation of bank branches, technical software, accounting policies, and different organizational cultures will not be an easy task.
  • Piecemeal measure: The basic issues of PSB recapitalization, rising NPAs, and poor governance will continue to remain unresolved unless holistic banking sector reforms are undertaken. PSB consolidation is merely one of the measures.

Way Forward As of the history of Banking sector reform in India, it was evident that the merger of PSBs is not an easy task. But looking at benefits of merger, this move is a landmark step towards the consolidation of banking operations in India. On the other hand, the merger can rejuvenate the public banking sector and will make the banks stronger and sustainable as well as increase their lending ability. A merger can increase the risk for overall economy substantially. Further, merger should come up with the following steps:

  • Ensuring a good environment for private sector banks to grow. Private banks should not be adversely affected by big PSBs.
  • Overcoming resistance to change by providing adequate education, capacity building and incentives to employees.
  • The holding bank should respect the distinct culture and objectives of the subsidiary bank and should not try to dominate them.

Thus, the merger offers opportunities as well as challenges. While consolidation is required to address the challenges of the banking sector, it is not a solution by itself. Careful implementation of merger can ensure that it is not only beneficial for the banking system but also for the entire economy.

Read More: Banking Sector Part – I  |  Reforms In the Banking Sectors