Merger and Consolidation of Public Sector Banks

Merger and Consolidation of Public Sector Banks

This article deals with ‘Merger and Consolidation of Public Sector Banks.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

Bank Mergers

  • 2016 : At Gyan Sangam II , it was decided that since Public Sector Banks aren’t performing well, there is need to consolidate banks by merging small banks with State Bank of India, Punjab National Bank , Bank of Baroda , Canara Bank etc. as Anchor Banks.
  • Crux : government is working on a consolidation of public sector banks with a view to creating 3-4 global-sized banks and reducing the number of state-owned banks to about 10-12.

Mergers happened till now

  • 2017 : SBI’s 5 Associated Banks & Bhartiya Mahila Bank merged with SBI .
  • 2019 : Vijaya & Dena Bank merged with Bank of Baroda . 
  • 2019 : Oriental Bank of Commerce and United Bank of India merged into Punjab National Bank .
  • 2019 : Syndicate Bank merged with Canara Bank .
  • 2019 : Andhra Bank and Corporation Bank merged with Union Bank of India .
  • 2019 : Allahabad Bank merged with Indian Bank .
Merger and Consolidation of Public Sector Banks
Merger and Consolidation of Public Sector Banks

Points in favour of Merger of Banks

  • (Economic Survey 2020) It will help to place more Indian Banks in the top 100 banks of the world  . It is sine quo none to have atleast 6-8 top-100 banks of the world in India, if we want to make India a financial hub of Asia and channelize global savings towards India to make India $ 5 trillion economy. Currently , India has just one bank in top 100 banks of the world (SBI = 55 Rank) while China has 18.
Number of top 100 banks in countries

India needs atleast 6-8 global 
banks in Top-100 to make India 
a $ 5 Trillion economy. 
(Economic Survey 2020)
  • Earlier State Bank of Saurashtra (2008) & Indore (2010) merger into SBI was successful . Hence, previous experience is pleasant.
  • Larger banks provide financial stability and act as engines of growth in times of trouble. Eg Chinese Banks in 2008 .
  • It will lead to  branch rationalisation and reduce operating costs .
  • Larger Public Sector Banks can support the corporate sector better in overseas acquisitions  as done by Chinese Banks.
  • For compliance with BASEL III Norms, if big bank like Consolidated SBI issue shares , they can fetch good response .
  • Enhanced geographical reach: For example, Vijaya Bank has strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers.
Merger of Banks

Points against Merger of Banks

  • Mergers eat up a lot of top management time . At a time when Public Sector Banks  need razor focus to deal with NPA menace , mergers will be very distracting .
  • Large banks aren’t necessarily efficient banks : The quest to create an Indian banking giant is old one when world looked  in awe at the Japanese banking giants . But their big size emboldened them to do excessive lending and ultimately they  had to be bailed out by taxpayers money  .
  • The merged State Bank of India is likely to be five times larger than its nearest competitor and can stifle the competition .
  • Setback to corporate governance :The merger sends out a poor signal of a dominant shareholder (the government) dictating decisions that impact the minority shareholders .
  • Banks will lose their regional identities .
  • Political Implications : Kerala Legislative Assembly has passed resolution that State Bank of Travancore’s merger with SBI will affect state’s economic growth negatively.
  • Protests: Addressing the concerns of unions and shareholders will be challenging.
  • Harmonization of Technology: It is a big challenge as various banks are currently operating on different technology platforms.

Best way to Merge : Merge banks that are complementary . Eg : Bank of Baroda with Dena and Vijaya Bank so that lay offs aren’t large .

Privatisation of Banks

  • Government is also reducing its shareholding to less than 50% in a Public Sector Banks .
  • Eg :
    • Government owned UTI Mutual Fund applied for UTI Bank License in 90s => Scam => UTI Bank privatised into Axis Bank
    • 2018 : IDBI Bank  Privatisation

IDBI Privatisation

Present Structure

  • Government had 81% ownership in IDBI Bank Limited. But Unlike in the other public sector banks, the government could reduce its stake in IDBI Bank  below 50%, because this bank is not governed by the Bank Nationalisation Act, 1969 .
  • June 2018 : Government was unable to find suitable private sector buyer for IDBI Bank. Hence, Government has started discussions with LIC to pick up a controlling stake of 51% (from  around 11% ) in a  deal of around Rs 10,000 crore .
  • March 2019 : RBI changed categorisation of IDBI to private sector lender following acquisition of majority stake by LIC
  • Budget 2020 : Finance Minister announced that Government will sell remainder 41% shares of IDBI Bank as well.
IDBI Privatisation
Positive Government  has not to  worry about BASEL-recapitalization of IDBI.
LIC can market its insurance policies to IDBI consumers (using bancassurance model) .
Negative IDBI Bank is the worst performing state-owned lender with NPAs as on March 31, 2018 of 28% .
– IRDAI do not permit LIC to raise its shareholding in a single listed entity beyond 15% to ensure that the Corporation does not put policyholders’ money at risk, and has a diversified portfolio.
Funds at the disposal of LIC are  policyholders’ money. Using those funds to buy a badly performing bank will deprive them from optimal returns .

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