Merger of PSU banks: Benefits and potential pitfalls

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By Kumar Prashant

On August 30, 2019, the Finance Minister, Nirmala Sitharaman, announced a merger of the country’s top public sector banks. Post consolidation, there will be 12 PSBs left over from the erstwhile 27.

The mergers are of Punjab National Bank, Oriental Bank of Commerce and United Bank. Further Canara Bank and Syndicate Bank will be merged, Union Bank, Andhra Bank and Corporation Bank are also set for merger followed by the merger of Indian Bank and Allahabad Bank

The merged entities will become the second, fourth, fifth and seventh largest public sector banks respectively.  To find out the impact on the financial system of our country and the rationale behind the move,  a look at the benefits and the downsides of the same.

The primary impact of the move will be on the lending capacity of these new financial entities. Instead of being fragmented, the lending capacity will be consolidated offering both the banks and their borrowers huge benefits in terms of lending amount, risk taking capacity and interest rates. This will increase their competitiveness in the market, as having more funds to disburse means having more legroom on interest rates and ability to fund very big projects. This move will go a long way in avoiding multiple financing of corporates which used to happen in the past. Also, due to a much larger network now, the fee income of the banks will also increase as now they will have a bigger market to pitch their insurance and mutual fund products.

After the merger, lateral competition among the banks, which used to compete for the same piece of business with the other banks will be eliminated. Smaller entities which are being merged with a bigger entity will be benefited by getting their experience and expertise in various areas like credit appraisal, risk management and systems and procedures.

The merger will also help in consolidation of CASA deposits which are so crucial as short term funds for any bank, further increasing the chances of profit for the banks. It will facilitate in improvement of their Capital Adequacy Ratio, a key element of the Basel III norms and which impacts the lending capabilities and risk rating of banks. In terms of NPA resolution, this move could be a game changer in cases where these banks have shared NPAs, saving valuable decision making time and human resources.

Post-merger, these banks will have a presence in almost all parts of the country and access to customers at places where, singlehandedly, they would have found it economically unviable to set up shop.

From the government’s point of view too, it will be much easier to monitor and manage a reduced number of large entities rather than many banks in a fragmented market. Therefore regulation will be better and implementation of policies will be more streamlined. This is good news for the regulator, Reserve Bank of India also, as it will have better control over the banks as their number becomes smaller. Since public sector banks act as instruments of social reform along with their commercial operations, this is a very crucial benefit that will be accrued.

But there are some potential downsides to this action too. First, having a small number of mega banks increases the chances of the economy reacting violently if any of these banks fail. Also, the entire process will be very complex, time consuming and disruptive in the short term. There will be a lot of HR issues to be solved and employees to be assured. And currently, when we are seeing a sort of a slowdown in our economy, it will be critical that the transition is as smooth and swift as possible, to enable these new banks to quickly focus on their core business in order to help revive the economy.

Therefore, though the merger of these banks seems to be a healthy and positive move towards a more efficient and far reaching financial system, it is critical that this is managed with utmost care and precision to make the move a success.

The author is currently working as the chief manager for training in State Bank of India, Panaji. The views and opinions expressed in the article are his own and not of the bank.