Big Bang Mergers – NextGen Public Sector Banks

Why in News?
Finance Minister Nirmala Sitharaman announced the merger of 10 public sectors banks into four entities. This would take the number in the country from 27 in 2017 to 12.

About the move
This move comes as the second wave of government’s efforts to revive the economy. The mergers are being done in order to create bigger banks with an enhanced capacity to give credits as stated by the Finance Minister.

The banks, after the move will also be able to able to increase their operational efficiency by reducing their cost of lending.

According to the Finance Ministry, the banks were chosen on the basis of enduring that there is no disruption in the banking services, and that the banks should benefit from increased CASA (current account savings account) and greater reach. The banks that are being merged with each other run the same or very similar platforms and so there will be no disruptions in their activities.

The Mergers

  • The largest of the mergers announced is that of Punjab National Bank with Oriental Bank of Commerce and United Bank – The amalgamated entity formed will be called the Punjab National Bank is set to become the second largest public sector bank in India. It will also become in India in terms of its branch network.
  • The second merger is that of Canara Bank and Syndicate Bank which possesses the potential to lead to large cost reductions due to network overlaps.
  • The third merger is of Union Bank of India with Andhra Bank and Corporation bank which will make the merged entity the fifth largest public sector bank in India. This merger has the potential to increase the post-merger bank’s business by 2-4 times.
  • The merger of Indian Bank and the Allahabad Bank constitute the fourth merger. This, too, is expected a doubling of the size of business and also lead to a huge potential for scaling up due thecomplementary networks of the two banks.

Advantages

  • It is a good move considering it will reduce the number of branches and improve cost efficiency.
  • The balance sheets post mergers are likely to be strengthen.The mergers are bound to help in proper NPA and risk management.
  • Certain banks will be able to expand their national presence and certain other banks will be able to strengthen their regional focus.
  • Merger sees a bigger capital base and higher liquidity and that reduces the government’s burden of recapitalizing the public sector banks time and again.
  • Redundant posts and designations can be abolished which will lead to financial savings.

Challenges/ Disadvantages

  • Merger of banks sometimes tend to destroy the idea of decentralization. Many banks have a regional audience to cater to but the mergers tend to centralize their operations as well.
  • Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks.
  • Coping with staffers disappointment could be another challenge for the governing board of the new bank. This could lead to employment issues.

The Government did not give the date by which the mergers are to be completed as that decision will be taken following further consolidation with the relevant banks.

The Finance Minister announced a number of small reforms to the boards of the banks aimed at improving their efficiency and accountability.

SOURCE:The Hindu, The New Indian Express



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