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Amalgamation of Public Sector Banks

Why in news?

Government has approved the amalgamation of ten Public Sector Banks (PSBs). At present, India has 18 state-owned banks compared with 27 in 2017. After the merger, the number will further come down to 12.

Benefits of Bank Consolidation

• Cost benefits as larger banks offer better economies of scale, efficiency, cost of funding, risk diversification. 
• Revenue benefits (economies and scope for large deals): Banks’ prudential norms limit the size of lending by banks as banks take risks as per banks’ size. Hence to invest in large projects, large banks with huge lending 
• Capacity is needed, to meet India’s aspirations of a $5 trillion GDP economy.
• The adoption of technologies across the amalgamating banks, access to a wider talent pool, and a larger database would lead PSB’s to be in a position to gain competitive advantage by leveraging analytics in a rapidly digitalising banking landscape.
• Consolidation would help create banks with scale comparable to global banks and capable of competing effectively in India and globally enhancing their competitiveness.
• Customer service: Larger size of the Bank will help the merged banks to offer more products and services and help in integrated growth of the Banking sector.
• Human Resource: The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.
• Improve regulation: Monitoring and control of a smaller number of banks will be easier after mergers.

Issues with Bank consolidation

• Too big to fail: 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. 
• In fact, large global banks collapsed during the global financial crisis, while, small banks have survived the crisis due to their nimbleness and the niche areas they operate in.
• May impact recovery of loans: Merger of public sector banks raises a considerable risk to the recovery process, which may differ from one bank to another. In the case of stressed assets, the creditors’ pool could process, which may differ from one bank to another. In the case of stressed assets, the creditors’ pool could be common, which may include several of the merged public sector banks while their hierarchy in the list of creditors would vary.
• Banks having different setup: It brings with it issues not only of cultural and managerial alterations, but also various financial conflicts, that could affect lending as well as recovery. Conflicts might arise in the area of systems and processes too.
• Not necessarily beneficial: A study covering 20 years of bank consolidation in industrial countries found it “beneficial up to a relatively small size, but there is little evidence that mergers yield economies of scope, or gains in managerial efficiency”. India’s past experience too has been mixed so far.

Way Forward

• While Narasimham Committee (1998) on banking reforms had also recommended the merger of strong public sector banks and selective closure of weak ones, bank merger alone does not improve performance matrix. The reform has to go hand in hand with other reform measures. e.g. EASE Index which ranks PSBs on parameters such as responsible banking, financial inclusion, credit off take and digitization.
• Also, to address issues arising during transition phase, it is necessary that resources be dedicated towards engaging competent teams to oversee and resolve issues arising out of such a transition phase. 
• Consolidation should be done as per requirementsto promote efficiency and competitiveness rather than just to merge under-performing banks with better performing ones.

Notable Points

• Merger of  10 state owned banks into 4 entities to take effect on 1 April
• Oriental Bank of Commerce (OBC) and United Bank of India will be consolidated into Punjab National Bank (PNB). After the merger, these two lenders will form the second-largest public sector bank in the country, after State Bank of India (SBI).
• Syndicate Bank will now be a part of Canara Bank, which will make it the fourth-largest public sector lender.
• Indian Bank will be amalgamated with Allahabad Bank.
• Union Bank of India will be merged with Andhra Bank and Corporation Bank
• Customers, including depositors of merging lenders will be treated as customers of the banks in which these banks have been amalgamated with effect from 1 April 2020.
• Post the merger, there will be 12 Public Sector Banks, six merged banks and six independent public sector banks.
• Six merged banks are State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Bank
• Six independent banks are Indian Overseas Bank, Uco Bank, Bank of Maharashtra, Punjab and Sind Bank, Bank of India, Central Bank of India.
• The Oriental Bank of Commerce and United Bank of India will now be operating as the branches of the Punjab National Bank from tomorrow (1 April 2020).
• Syndicate Bank will function as the branch of Canara Bank effective 1 April 2020.
• Similarly, all Allahabad Bank branches will be now treated as branches of the Indian Bank
• All branches of Andhra Bank and Corporation Bank will function as Union Bank of India branches with effect from today i.e. 1 April, 2020.
• Earlier this month the cabinet gave the go-ahead for the mergers that will amalgamate operations of 10 public sector banks (PSBs) into four ‘mega banks’.

Why in news? Government has approved the amalgamation of ten Public Sector Banks (PSBs). At present, India has 18 state-owned banks compared with 27 in 2017. After the merger, the number will further come down to 12. Benefits of Bank Consolidation Cost benefits as larger banks offer better economies of scale, efficiency, cost of funding,…

Why in news? Government has approved the amalgamation of ten Public Sector Banks (PSBs). At present, India has 18 state-owned banks compared with 27 in 2017. After the merger, the number will further come down to 12. Benefits of Bank Consolidation Cost benefits as larger banks offer better economies of scale, efficiency, cost of funding,…