Our Finance Minister, Nirmala Sitharaman, has unveiled a mega merger plan for public sector banks (PSBs) on 30th August, 2019, amalgamating 10 banks into 4. Due to this consolidation, the total number of public sector banks will be brought down to 12 from 27, as of 2017. This is the biggest overhaul in the public sector space after fifty years of bank nationalization. This consolidation is expected to create stronger but fewer lenders as well as boost the economic growth of a sex-year-low. This merger is probably happening to stay on course for the government’s stated target of touching $5 trillion as an economy. Apart from revising and revitalizing the banking sector, the centre announced that Rs 55,250 crore upfront capitals will be infused into the PSBs. This article is a must-read to understand the widest rearrangement of the banking sector since the nationalization of 14 banks in July 1969, especially after the underwhelming 5% GDP growth last quarter. It will help you understand the merger in detail as well as look briefly at what the future could look like for the banking sector in India.
There is an anchor bank as well as amalgamating banks, in the merger, where the latter will get merged with the former. India’s second largest lender will be formed by three banks- Punjab National Bank, Oriental Bank of Commerce, and United Bank of India. It will have the second largest bank network with 11,437 branches and a combined total of 18 Lakh crore businesses. The fourth largest PCB, with business worth 15.2 Lakh crore, will be formed by the merging of Canara Bank and Syndicate Bank. It will also have the third largest network with 10,324 branches. Fourth largest network with business worth of 14.6 Lakh Crore will create the fifth largest PCB by merging of Union Bank of India with Andhra Bank and Corporation Bank. The new entity which will be the seventh largest PCB with 8.08Lakh Crore of business worth will be formed by the merging of Indian Bank with Allahabad Bank.
$5-Trillion GDP Target
In terms of advances and deposits are meant to create a stepping stone to India's $5 trillion GDP target, two-thirds of India's banking will be controlled by these new entities. India will have two national banks and four regional banks; in essence, it will have 6 large public sector banks with Rs 10 Lakh crore-plus balance sheets. The four banks with strong regional focus that will continue to operate as separate entities are Indian Overseas Bank, Uco Bank, Punjab and Sind Bank, and Bank of Maharashtra.
There will also be an upfront capital infusion of Rs 55,250 Crore, as announced by the centre, for credit growth & regulatory compliance to support the economy. Uco Bank will receive 2,100 crore, Bank of Baroda 7,000 crore, Indian Overseas Bank 3,800 crore, Indian Bank 2,500 crore, Union Bank 11,700 crore and PNB will receive 16,000 crore. Punjab and Sind Bank will get 750 crore from the centre while United Bank will see an infusion of 1,600 crore. There are increasing number of indicators show the Indian economy slowing down. This infusion of capital is intended to lift it up. Moreover, the centre, according to Nirmala Sitharaman, is monitoring large loans to avert frauds. There is a separation established between sanctioning and monitoring of the loans. Also, special agencies have been formed to supervise loans above Rs 250 crore to avoid a Nirav Modi-like situation.
Benefits of Consolidation
By unlocking “potential through consolidation”, the government has listed three broad gains.
Firstly, the capacity to increase credit will be enhanced through consolidation. Even if they have higher capacity to lend after the merger, they will still need capacity building, especially in risk management, monitoring and in project appraisal. Even with its huge balance sheet, a bank like SEBI found itself in trouble with similar asset quality issues as other PSBs.
Secondly, national presence and global reach has become the primary claim of the government for taking this step. About two-thirds of the entire banking system will already be controlled by these PSBs. However, these Indian banks have a lot to catch up as far as global reach is concerned. The share of PSBs is being eaten into by the competition from private banking institutions. These private institutions have better digitization, faster processing of loans, and incredible customer service.
The operational efficiency gains that reduce the cost of lending are the third potential benefit of this consolidation. The entire operating model will have to change in this arena. We cannot deny that PSBs still work in a very old-fashioned structure. With product focused banks, the framework of the industry has significantly changed in the last decade. There are payment banks, small finance banks, retail banks and more. There is a relatively outmoded loop of corporate banking that PSBs are still trapped in while private banks are exiting the space due to asset-liability management issues.
In Conclusion
The biggest advantage of this merger is that bigger banks have greater ability to absorb shocks, reap economies of scale as well as the enhanced capacity to raise resources without depending on the exchequer. However, there is no guarantee, of course. The biggest example is SEBI itself. Even India’s largest bank is not able to figure in the top quartile in terms of performance. We do not need more clones of each other. In cases of SME or emerging corporate-focused banks or purely retail banks or large corporate banks, there should be differentiation in product category. We already have specialized banks in the market. Moreover, PSBs’ shares have been on a selling spree following the government announcement to merge banks. Therefore, this merger move could be counterproductive, especially in a slowing economy where the asset quality deterioration of PSBs has still not receded.
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