Uniting of PSBs an analysis on the merger of Banks 2019

Uniting of PSBs an analysis on the merger of Banks 2019

The Government of India; Ministry of Finance announced a Uniting of 10 PSBs,

The government announced a megabank amalgamation plan that merged 10 PSBs into four larger entities

  • Banks have been merged on the basis of likely operating efficiencies, better usage of equity, geographical synergies and their technological platform
  • There are four new sets of mergers 
    • Punjab National Bank, Oriental Bank of Commerce and United Bank of India to merge to form the country’s second-largest lender. These three banks are technologically compatible as they use Finacle Core Banking Solution platform.
    • Canara Bank and Syndicate Bank to amalgamate; 
    • Union Bank of India to acquire Andhra Bank and Corporation Bank;
  •  
    • Indian Bank (Strong presence in South India) to merge with Allahabad Bank (strong presence in East & North India) – To maximise geographical synergies.
  • The government also announced to infuse 55,250 crores in these banks to enable them to grow their loan book
  • The government also unveiled governance reforms in PSB, providing their boards greater autonomy, flexibility to fix sitting fee of independent directors, longer-term to directors at management committee of boards etc.

Do You Know?

  • Out of the 10 banks that the government has decided to merge to create four, nine have net non-performing assets (NPAs) of over 5%.
  • The government had merged Dena Bank and Vijaya Bank with Bank of Baroda on January 2019, creating the third-largest bank by loans in the country.
  • With this series of mergers, the number of state-owned banks is down to 12 from 27.
  • Narasimham Committee of 1998 had proposed a three-tier banking structure for India – Three large banks of international size, eight to 10 national banks and a large number of regional banks.

New mergers include: Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second-largest lender.

  1. Canara Bank and Syndicate Bank will merge.
  2. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank.
  3. Indian Bank will merge with Allahabad Bank.

Context:

  • The Centre Friday announced a mega amalgamation plan, the third in a row, that merged ten public sector banks into four larger entities, alongside board-level governance reforms aimed at improving their financial health and enhancing their lending capacity to support growth.

The public sector bank merger

  • The merger announcement was followed by an equity infusion move of Rs 55,250 crore in these banks to enable them to grow their loan book. With this series of mergers, the number of state-owned banks is down to 12 from 27.

There are four new sets of mergers — 

  • Punjab National Bank, Oriental Bank of Commerce and United Bank of India to merge to form the country’s second-largest lender;
  • Canara Bank and Syndicate Bank to amalgamate; 
  • Union Bank of India to acquire Andhra Bank and Corporation Bank; and 
  • Indian Bank to merge with Allahabad Bank.
  • The biggest merger out of the four was Oriental Bank of Commerce and United Bank merging into Punjab National Bank to create a second-largest state-owned bank with Rs 17.95 lakh crore business and 11,437 branches. These three banks are technologically compatible as they use Finacle Core Banking Solution (CBS) platform
  • The merger of Syndicate Bank with Canara Bank will create the fourth-largest public sector bank with Rs 15.20 lakh crore business and a branch network of 10,324 branches. Canara Bank will get a capital infusion of Rs 6,500 crore.
  • Andhra Bank and Corporation Bank’s merger with Union Bank of India will create India’s fifth-largest public sector bank with Rs 14.59 lakh crore business and 9,609 branches. The government announced a capital infusion of Rs 11,700 crore for the Union Bank of India.
  • The merger of Allahabad Bank with Indian Bank will create the seventh-largest public sector bank with Rs 8.08 lakh crore business with strong branch networks in the south, north and east of the country. Indian Bank will get equity infusion of Rs 2,500 crore.

The logic behind the mergers

  • According to the government, banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform. 
  • But the move marks a departure from the plan to privatise some of the banks or bringing in strategic investors to usher in reform in the sector. 
  • The government, after consultations, 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

Previous bank mergers

  • Last year, the government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country.
  • Earlier, the State Bank of India had acquired its associate banks

How this move will help?

  • The Banking sector as a whole will get strengthened due to obvious efficiencies and will lead to enhanced productivity and better results thereby leading to better lending too
  • The mergers should help create stronger institutions thereby leading to efficiencies of scale and stronger balance sheets. 
  • It will help rationalize costs across many areas including branches, people, technology etc.
  • The branch network would become larger so access to bank branches would become easier provided the merged entity does not shut down all branches of merging banks 

Connecting the dots:

  1. More than banks, it is the operation of banks is what creates financial inclusion. Discuss the impact on the banking sector with merging
  2. Why is the government keen on consolidating the banks? Are there any merits of merging the banks to create banking behemoths? Critically evaluate

Why the merger is good? – Benefits of various stakeholders:

For Banks:

  1. Small banks can gear up to international standards with innovative products and services with the accepted level of efficiency.
  2. PSBs, which are geographically concentrated, can expand their coverage beyond their outreach.
  3. A better and optimum size of the organization would help PSBs offer more and more products and services and help in the integrated growth of the sector.
  4. Consolidation also helps in improving professional standards.
  5. This will also end the unhealthy and intense competition going on even among public sector banks as of now.
  6. In the global market, Indian banks will gain greater recognition and a higher rating.
  7. The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
  8. This will also reduce unnecessary interference by board members in day to day affairs of the banks.
  9. After mergers, the bargaining strength of bank staff will become more and visible.
  10. Bank staff may look forward to better wages and service conditions in future.
  11. The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.

For the economy:

  1. Reduction in the cost of doing business.
  2. Technical inefficiency reduces.
  3. The size of each business entity after the merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
  4. After the merger, Indian Banks can manage their liquidity – short term as well as long term – position comfortably.
  5. The synergy of operations and scale of economy in the new entity will result in savings and higher profits.
  6. A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.
  7. Customers will have access to fewer banks offering them wider range of products at a lower cost.
  8. Mergers can diversify risk management.

For the government:

  1. The burden on the central government to recapitalize the public sector banks, again and again, will come down substantially.
  2. This will also help in meeting more stringent norms under BASEL III, especially the capital adequacy ratio.
  3. From a regulatory perspective, monitoring and control of less number of banks will be easier after mergers.

Concerns associated with the merger:

  1. Problems to adjust top leadership in institutions and the unions.
  2. Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
  3. Mergers will result in immediate job losses on account of a large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other. This will worsen the unemployment situation further and may create law and order problems and social disturbances.
  4. Mergers will result in a clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
  5. When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.

Way ahead:

The merger is a good idea. However, this should be carried out with the right banks for the right reasons. Merger is also tricky given the huge challenges banks face, including the bad loan problem that has plunged many public sector banks in an unprecedented crisis.

Committees in this regard:

  1. Narasimham committee (1991 and 1998) suggested a merger of strong banks both in public sector and even with the developmental financial institutions and NBFCs.
  2. Khan committee in 1997 stressed the need for harmonization of roles of commercial banks and the financial institutions.
  3. Verma committee pointed out that consolidation will lead to pooling of strengths and lead to an overall reduction in the cost of operations.

Benefits of MergerCompetetive: The consolidation of PSBs helps in strengthening its presence globally, nationally and regionally.

  • Capital and Governance: The government’s intention is not just to give capital but also give good governance. Hence, post-consolidation, boards will be given the flexibility to introduce the chief general manager level as per business needs. They will also recruit chief risk officer at market-linked compensation to attract the best talent.
  • Efficiency: It has the potential to reduce operational costs due to the presence of shared overlapping networks. And this enhanced operational efficiency will reduce the lending costs of the banks.
  • Technological Synergy: All merged banks in a particular bucket share common Core Banking Solutions (CBS) platform synergizing them technologically.

Core Banking Solutions

  • Core Banking Solutions (CBS) can be defined as a solution that enables banks to offer a multitude of customer-centric services on a 24×7 basis from a single location, supporting retail as well as corporate banking activities.
  • The centralisation thus makes a “one-stop” shop for financial services a reality. Using CBS, customers can access their accounts from any branch, anywhere, irrespective of where they have physically opened their accounts. The customer is no more the customer of a Branch. He becomes the Bank’s Customer.
  • Self-Sufficiency: Larger banks have a better ability to raise resources from the market rather than relying on State exchequer.
  • Recovery: The loan tracking mechanism in PSU banks is being improved for the benefit of customers.
  • Monitoring: With the number of PSBs coming down after the process of merger – capital allocation, performance milestones, and monitoring would become easier for the government.

Challenges

  • Decision Making: The banks that are getting merged are expected to see a slowdown in decision making at the top level as senior officials of such banks would put all the decisions on the back-burner and it will lead to a drop in credit delivery in the system.
  • Geographical Synergy: During the process of merger, the geographical synergy between the merged banks is somewhat missing. In three of the four merger cases, the merged banks serve only one specific region of the country.

    • However, the merger of Allahabad Bank (having a presence in East & North region) with the Indian Bank (having a presence in South) increases its geographical spread.
  • The slowdown in Economy: The move is a good one but the timings are not just apt. There is already a slowdown in the economy, and private consumption and investments are on a declining trend. Hence, there is a need to lift the economy and increase the credit flow in the short-term, & this decision will block that credit in the short-term.
  • Weak Banks: A complex 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.

Q.1) Consider the following statements

  1. Merging of Public Sector banks will improve operating efficiencies, lead to better usage of equity, enhance geographical synergies and helps tackle rising NPA problem.
  2. With the recent mergers of Public sector banks, the number of state-owned banks is reduced from 27 to 12.
  3. Narasimham Committee of 1998 had proposed a two-tier banking structure for India – Three large banks of international size and eight to 10 national banks

Which of the statement(s) given above is/are correct?

  1. 1and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1,2 and 3

Q.2) Consider the following statements 

  1. The World Population Prospects 2019 which gives global population estimates and projections is released by World Economic Forum
  2. India’s present Maternal Mortality Ratio and the adolescent birth rate are higher than the corresponding global ratio/rate.
  3. India’s fertility rate in 2019 is 2.3 births per woman, compared to 2.5 worldwide

Which of the statement(s) given above is/are incorrect?

  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1,2 and 3

Q.3) Consider the following statements 

  1. Fit India movement is aimed at encouraging people to integrate physical activity and sports in their everyday lives. 
  2. National Sports Day is celebrated on 29th August, the birth anniversary of hockey legend Major Dhyan Chand.

Which of the statement(s) given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Q.4) Angikaar campaign is being implemented by which Union Ministry?

  1. Ministry of Social Justice & Empowerment
  2. Ministry of Tribal affairs
  3. Union Housing and Urban Affairs Ministry
  4. None of the above

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