Topic 6: Impact of Merger of PSU Banks
September 14, 2020
The banking sector forms the very base of our economy thus it is of momentous importance to keep this sector healthy and strong. This desire for growth has increased the merger and acquisition activities across the board and the Indian Banks too did not stay aloof from this wave of mergers and acquisitions (M&A). Initially, banks were merged to save non-performing banks or non-efficient banks but as time evolved the system evolved too. In recent times mergers and acquisitions have also been made on grounds of business growth, profitability, and organizational structure.
With 27 public sector banks, including the second-largest PNB, being merged and reduced to 12, almost every other individual who has a savings account or fixed deposit with a public sector bank is likely to be impacted. The finance minister, Nirmala Sitharaman in her press briefing said that the creation of next-generation banks was imperative for India to become a $5 trillion economy in the next five years.
- By merging comparatively weaker banks with the stronger banks, the Government has made effort to make sure that the weaker bank is not wiped out from the market because of the bad loans/NPAs. By merging the banks, the legal cost and other ancillary costs will comparatively come down as it is seen that the same borrower has taken a loan from a number of banks.
- A big customer base will help the banks to have good profitability as the merged bank will enjoy synergies. The merged banks will have the better business portfolio, asset quality, improved market capitalization, risk appetite, and risk management strategies.
- The merged banks will enjoy economies of scale and reduction in the cost of doing
- business. Post-merger the banks will be in a better position to finance mammoth projects which earlier they could not finance independently thus making the funding process for those projects quick and easy.
- With comparatively fewer banks to manage, RBI will be able to implement the banking standards followed by the developed economies and thus bringing Indian banks in line with the banks having an International presence.
- Merging will help the banks to pool the resources and use them in an effective and efficient manner. The mergers will result in the rationalization of branches, roles, and functions getting reduced. However, the Finance Minister has confirmed that there will be no retrenchments and the employees will only benefit from the mergers.
- Various internal conflicts and disputes may arise with regard to promotion and other potential issues.
- Different banks use different software platforms so aligning them with the merged bank will be a tough nut to crack.
- It is said that when the bank becomes oversized, it becomes tough to manage its functioning and in case the bank starts to fall then the entire economy is jeopardized.
- In the short run, not only a consolidation of PSBs (public sector banks) may divert a significant proportion of management and employee bandwidth away from growth but it may hurt credit growth, stall recoveries, and gift market share to private banks. It is clear that the benefits of the mega-merger of these ten public sector banks would accrue only beyond two-three years.
- According to the experts, even though the government has allocated additional capital and is pushing for co-lending, there will be a slowdown in loan growth as witnessed in earlier mergers as well which cannot be good at a time when liquidity flow is severely constrained.
Synergized Strategy of PSU Bank Mergers
Mergers of PSU’s from 27 PSU’s to being 12 PSU’s, certainly impacts the Banking Books of Accounts in a favorable* Synergized *result. Consortium based only Profitable lending will be done by the merged Banks. Efficiency in banking will increase and the earlier NPAs could be securitized with changed refinancing under the Merged PSU’s. Also, The Basel Accord III based requirement of maintenance of Capital to Risk-Weighted Assets of PSUs shall be adhered to, thus contributing profitability to Bank NIFTY on Equity Stock Market(NSE).