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 an important pillar of the GS-3 syllabus. For more articles, you can click here.

Bank Mergers

  • In 2016, it was decided in Gyan Sangam II that since Public Sector Banks aren’t performing well, there is a need to consolidate banks by merging small banks with the State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank etc. as Anchor Banks. 
  • The crux of the matter is the government is working on a consolidation of public sector banks to create 3-4 global-sized banks and reduce 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 in placing more Indian Banks in the top 100 banks of the world. It issine quo non to have at least 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 a $ 5 trillion economy. Currently, India has just one bank in the top 100 banks (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. E.g. Chinese Banks in 2008.
  • It will lead to branch rationalization and reduce operating costs.
  • Larger Public Sector Banks can support the corporate sector better in overseas acquisitions as done by Chinese Banks.
  • To comply with BASEL III Norms, if big banks like Consolidated SBI issue shares, they can fetch a 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 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 the 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 complementary banks. E.g., Bank of Baroda with Dena and Vijaya Bank so that layoffs aren’t large.

Privatisation of Banks

  • The government is also reducing its shareholding to less than 50% in Public Sector Banks. This is known as the Privatization of Public Sector Banks.
  • E.g.:
    • Government-owned UTI Mutual Fund applied for UTI Bank License in the 1990s. Later, after the scam, UTI Bank was privatized into Axis Bank.
    • 2018IDBI Bank privatization 
Privatisation of Banks
  • 2021 Budget: Government has announced to privatize two Public Sector Banks.

Case for Privatisation of Banks

  • Improve the overall efficiency of the Banking Sector: Even though the PSBs and New Private Banks are operating in the same domestic market, the PSBs are considered less efficient, thus leading to the loss of taxpayers’ money.   
  • Government’s Monopoly: The Government ownership in the PSBs, which account for almost 70% of the Banking assets, has led to a kind of virtual monopoly of government that reduces the competition, breeds inefficiency and thus hurts the overall growth of the Banking Sector.
  • Better human resource management: Privatisation will help in introducing a high degree of professional management. On account of huge human capital deficit, PSBs are seriously handicapped vis-à-vis their competitors. 
  • Reduce the burden on the government by doing away with the need for undertaking their recapitalization to comply with the higher BASEL III requirements

Arguments against

  • Improve the Governance framework of PSBs: The main reason for the lower efficiency of the PSBs is actually the government’s political intervention in the functioning of the PSBs, which is in turn leading to a lack of autonomy and freedom to the PSBs and thus hurting their revenues.
  • Financial exclusion of weaker sections: It can lead to financial exclusion of weaker sections as the private sector cares about profits.
  • Job loss: Public Sector Banks employ a large number of people who can lose their jobs in case of privatisation of banks as one of the first things banks do after privatisation is employee retrenchment and branch closures.
  • Depriving SC/ST/OBCs of benefiting from reservation: Since private banks are not mandated to provide reservations to SC/ST/OBCs in jobs, it hurts the social empowerment of weaker sections of society.
  • Concerns regarding bank failures and safety of deposits: Private sector banks are prone to failures due to the absence of sovereign guarantees. Bank failures have a large contagion effect on the economy as savings of the households get locked.

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