Merger And Amalgamation Of Public Sector Banks
Post on 08,September 2019   2:00 PM
By - Mr. Piyush Yadav
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Years back, Narsimhan Committee recommended a 3 tier banking structure that involves 2-3 large banks of International size, 8-10 national banks and a large number of rural banks. Clearly, these recommendations have been gone to deaf ears since even after several mergers, none of the Indian large banks including SBI figured in the list of top 50 global banks. The committee also said that two large banks should merge to form a bank of International level and cautioned that a large bank should not merge with a weak bank but as far as recent mergers are concerned, this has been the case.

 

Recent steps by the Government: After the merging of State bank of India with five of its associate bank in 2017 and also the merger of Vijaya Bank, Dena Bank with Bank of Baroda in 2018, the Finance Minister recently announced that 10 banks owned by the Government of India will be merged into four larger banks viz a viz;

  • Indian Bank will amalgamate with Allahabad bank,
  • Punjab National Bank will be merged with Oriental Bank of Commerce and United Bank;
  • Canara Bank with Syndicate Bank,
  • Union Bank of India with Andhra Bank and Corporation Bank.

Difference between Merger and Amalgamation 

Merger: It is the combination of two business entities to form a larger one but with no explicit change in ownership.

 

Amalgamation: It is a process in which two or more companies combine their businesses to form an entirely new entity/company.

 

Why consolidation is required:

  • Large banks will be able to lend more money that will help to revive the slowing economy and arrest the faltering growth.
  • The increase in credit growth is instrumental to achieve the target of $5 trillion economy by 2024 as highlighted by Economic Survey 2019.
  • Merger will lead to an increase in operational efficiency of the banks that will help them to lower their costs, thus lowering their lending rates.

 

Downsides of these consolidations:

  • The present merger does not address the issue of political interference in the management of public sector banks which is the root cause of this bad loan crisis.
  • The primary risk is the creation of Systematically Important Institutions which brings the concept of ' Too Big To Fail'. Any future default in these institutions will make the government resort to bailout that will adversely affect its revenue.
  • When the management of a strong bank will get diluted, it may lead to considerable deterioration in the overall health of the banking system.
  • Managers of goods banks possibly could take it as a punishment for their good performance by being asked to share the burden with the weaker banks and that could result to form a scenario where they see fewer incentives to manage well.
  • Merger has a risk of cultural fit amongst the members working together henceforth and also of fewer career opportunities in management with the redeployment of staff.

 

Conclusion:In the wake of faltering growth, a slew of reforms is surely the need of the hour but it remains to be seen whether the operational benefits that the government believes to come about through the merger will compensate for the deterioration in the financials of the stronger banks.

 

As the former RBI Governor Y V Reddy said; if the problem is structural and that of governance, it hardly matters whether the banks are large or small.


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