Economics Current

The Merger of Public Sector Banks

The Merger of Public Sector Banks
Bill Gates had famously said in 1994, with reference to the technology revolution that was sweeping the banking sector, that “Banking is necessary, but banks are not.” This is an important statement to consider in light of the context of public sector banks (PSBs) in India. Definitely, banking needs to expand, but questions have been raised about the large number of public sector banks in the country and their usefulness. After the recently concluded merger of five Associate Banks (ABs) with the State Bank of India (SBI), the number of PSBs in India is now down to 21. The government is said to be considering the reduction of the number further from twenty one to six by merging larger PSBs as well as by merging the “weak” and smaller PSBs with stronger ones. Background Consolidation of PSBs is not a recent initiative. The Narasimham Committee had recommended a three-tier banking structure by merging PSBs, which would lead to a count of three large banks having international presence, 8–10 national banks, and several regional banks across the country. This was back in 1991, when PSBs held more than 90 percent of the market share. Since the onset of reforms, there have been 32 bank mergers, which involved private sector banks as well. There is only one instance of the merging of two PSBs, which was the takeover of the New Bank of India by Punjab National Bank (PNB) in the year 1993. The Reserve Bank of India had forced this merger under Section 45 of the Banking (Regulation) Act, 1949. This was done as the New Bank of India had reached a precarious state of liquidity. The PNB had been a strong bank with an uninterrupted record of profits, however, it had to suffer a net loss of rupees 96 crore in 1996 after the merger with the New Bank of India. It also had to deal with several problems and litigation with relation to absorbing the staff of New Bank of India. According to reports, it took PNB more than five years to get over the merger effect. Recent mergers The recent merger of five Associate banks with the State Bank of India has been considered as path-breaking in this field. Three of these ABs were stock-listed entities where the SBI had dominant holdings, the other two were solely owned by the SBI. Financial experts have said this merger should actually be viewed as an internal reorganisation within the SBI and not as a merger exercise. The Narasimham Committee had said that the SBI should ideally merge all the seven subsidiaries one by one with itself. The State Bank of Saurashtra was the first to merge with SBI in 2008, and the State Bank of Indore followed suit in 2010. The Government of India had directed the SBI in 2016 to complete the merger of the remaining five ABs by March 2017- State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Travancore, State Bank of Patiala and State Bank of Mysore. In September 2018, the government announced the merger of three public sector banks- Bank of Baroda, Dena Bank, and Vijaya Bank. The combined entity is to be India's third largest globally competitive bank. What are the benefits of mergers? •The PSU mergers are set to drastically decrease the costs of undertaking banking operations, lead to more efficient management of non-performing assets and lead to risk minimization. •The mergers will lead to pooling of expertise in every sphere of banking operation, which will increase efficiency in banking, resolve issues such as retirements more easily and create a stronger and more unified entity. •Economies of scale are set to increase with more investments in technology. A more consolidated banking sector with fewer and larger banks would be more flexible to adapt to changes in the economy. Problems relating to mergers •Matters relating to consolidation exercise of the public sector banks has become a national issue following their mounting non-performing assets (NPAs), as well as due to the added pressures for infusing additional capital faced by the government. •One can notice a visible sense of urgency to haste through a process that should have ideally been spaced out in a well-thought-out and planned manner from the time it was mooted more than twenty years earlier, in this process of consolidation. •The excessive bad loans in some of the PSBs have not been a recent phenomenon. The public sector Indian Bank, for instance, was once under duress with a record loss of rupees 1,336 crore back in 1996, which was a result of bad credit decisions in the past. There were also suggestions to restrict the Indian Bank as a “narrow bank.”, however, the institution did a remarkable turnaround in three years and bounced back to sustained profitability and is now an active participant on the stock market. Possible solutions The exercise of consolidating the public sector banks should ideally be based on an extensive analysis of every PSB, an analysis of its assets and liabilities, loan exposures, security back-up, common loans among PSBs, and all other relative considerations. Public sector banks mergers can be made much more effective if the top brass is free from the constant and continuous stress of resolving non-performing assets (NPAs), so that they can turn their attention to reaping the possible economic benefits that can be opened by the mergers, according to financial experts. For any schemes related to mergers or other reconstructions, the main challenge faced by all PSBs is the shortage of talent, i.e., an acute talent deficit wherein the required number of people needed to operate are not available in sufficient numbers. Every PSB which is on the merger radar invariably lacks talented and efficient personnel to effectively take care of even the existing operations undertaken at the respective banks. There is no uniform structure in the information technology architecture of the PSBs. Almost every bank has engaged multiple vendors with developing their respective technical systems, thus, issues like this relating to technology need to be resolved before mergers can be carried out.
Source: https://pixabay.com/vectors/accountant-counting-calculation-1794122/



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