Story Of The Week

Wave of Bank Mergers

In a view to redefine India’s Banking space, Finance Minister Nirmala Sitharaman announced the merger of 10 public sector banks (PSBs) into four entities on August 30, 2019.

Nirmala Sitharaman announced the extensive consolidation of the state owned banks to form four big lenders in order to strengthen the Banking sector. She said, “We want to create next generation banks”, aimed at creating lenders of global scale that can support the economy’s surge to $5 trillion by 2024. The government has announced Rs 55,250 crore capital infusion upfront in these Public Sector Banks.

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Source: DNA India

Reasons behind these mergers

After Nirmala Sitharaman announced the mergers, the total number of Public Sector Banks(PSB)  in the country came down to 12 from 27 in 2017.

With the slowdown in the economy and a rise in the gross NPA, the centre attempts to boost economic growth following a 6 year low, this consolidation is expected to create fewer, and stronger lenders with a global reach. Sitharaman announced that these mergers are being undertaken in order to revive and revitalize the banking sector to stay on course for the government’s stated target of $5 trillion economy. These mergers will not only help in creating stronger institutions but also lead to economies of scale and healthier balance sheets. It will help rationalize costs across many areas including branches, people and technology. Customers should be able to get better service, better products and the best of all the merged entities. The Big Banks, with enhanced capacity to increase credit and a bigger risk appetite, will help the economy to grow at a faster pace.

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Source: MoneyControl

After-effects of consolidation

As quoted by the former finance minister Late Arun Jaitley -“ We need stronger banks rather than numerically larger banks”, by these mergers the government has set the ball rolling on this plan now.

These mergers will bring about certain implications which are as follows:

  1. An increase in branch networks which would result in easier access to the bank branches.
  2. This will help in scaling the banks more efficiently since a larger bank would have a lower aggregated risk profile as compared to a smaller bank.
  3. The NPA figure for most of the public sector banks is in excess of 10%, so instead of providing additional provisions to the smaller banks to tackle the NPA issue, the amount can now be utilized more effectively by the larger entity.
  4. However, since most of these banks are listed on the stock exchange, shareholders of these banks will be impacted in some way or the other. The extent of this impact will be known once the swap ratios are announced by the respective larger banks.

What are the risks involved in these mergers?

  1. Several economists have expressed concerns related to the timings of these mergers. When the economy is going through rough times, we need banks to focus on lending and providing capital in the economy. But mergers could distract the attention of top management of the bank into activities related to mergers.
  2. There are also concerns that larger banks have not shown much success in the past. Consolidation of BOB, Dena Bank and Vijaya bank is yet to show any prominent figures of improvement.
  3. Bank mergers also involve risk of the consolidated banking system in the country, where most of the capital assets are controlled by a few banks, although India currently has a fragmented kind of banking system, the concern is genuine.
  4. Members of the All India Bank Employees’ Association directed a protest against the centre’s decision to merge 10 banks into four entities. Employees of the public, as well as the private sector banks, wore black badges as a mark of protest to the government’s decision.

 Will these mergers have an impact on customers?

  1. The customers of these banks will not face any trouble in the short run, but over a period of time, they would need to keep track of how the changes related to integration will impact their account number and possibly some of the automated instructions that they would have set up for payments of utility bills, loans, SIPs, etc. so that the payments are not eventually affected. 
  2. Clearly there won’t be any loss of information for the customers but the customers need to be ready for certain prominent changes like the change in Account number, Customer ID’s and associated IFSC codes. Customers would also need to make sure that their active e-mail ID and phone number are updated with the bank so that they do not miss any official intimations from their banks.

    Master

    Source: The Economics Times

Way Forward:

The government has taken a slew of measures across various sectors to control the slumping economy. Nevertheless, any such measure starts with banks, as they are rudimentary to an economy. With the growing skepticism among some economists as to whether these mergers would be benign to its purpose, there are many other economists who believe that this move has a hope of reviving the economy. Despite all the squabble, the question of “When?”- when can a visible recovery be discerned, remains.

References

The Hindu

Economic Times

The Times of India 

Mint

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