Do you think bank mergers are a solution for the Public sector banks in India? Critically discuss. (250 Words)

Mentors Comments:

1. Discuss recent examples of bank mergers in India
2. Mention the reasons why they are beneficial
3. Also discuss how mergers pose additional problems, rather than solving existing ones
4. Touch upon the aspect why they are not a solution- mention various committee recommendations on resolving PSB ailments

https://www.google.com/amp/s/www.thehindu.com/opinion/editorial/big-bank-theory/article29302726.ece/amp/

Answer:

The Centre announced a mega amalgamation plan, the third in a row, that merged 10 public sector banks into 4 larger entities. Various committees like the Narasimham committee had suggested the merger of strong banks both in the public sector and even with the developmental financial institutions and NBFCs.

Following are the Reasons for Merger-
 To protect weak PSBs from loss – thereby securing customers and financial systems.
 Absence of international level bank – with only one bank in the list of top 50 largest banks in the world understates the global clout we share in the present scenario.
 Bigger banks would also be able to adhere to BASEL III norms.
 The problem of credit lending, based on the twin balance sheet crisis, can be checked by the formation of bigger banks.
 Bigger banks with diverse portfolios have lesser chances of failure since it is unlikely that different sectors of an economy will face a crisis at the same time.

Following are the Benefits of Merger-
Competetive: The consolidation of PSBs helps in strengthening its presence globally, nationally and regionally.
Capital and Governance: The government’s intention is not just to give capital but also give good governance. Hence, post-consolidation, boards will be given the flexibility to introduce the chief general manager level as per business needs. They will also recruit chief risk officer at market-linked compensation to attract the best talent.
Efficiency: It has the potential to reduce operational costs due to the presence of shared overlapping networks. And this enhanced operational efficiency will reduce the lending costs of the banks.
Technological Synergy: All merged banks in a particular bucket share common Core Banking Solutions (CBS) platform synergizing them technologically.
Self-Sufficiency: Larger banks have a better ability to raise resources from the market rather than relying on State exchequer.
Recovery: The loan tracking mechanism in PSU banks is being improved for the benefit of customers.
Monitoring: With the number of PSBs coming down after the process of merger – capital allocation, performance milestones, and monitoring would become easier for the government.

Challenges
Decision Making: The banks that are getting merged are expected to see a slowdown in decision making at the top level as senior officials of such banks would put all the decisions on the back-burner and it will lead to a drop in credit delivery in the system.
Geographical Synergy: During the process of merger, the geographical synergy between the merged banks is somewhat missing. In three of the four merger cases, the merged banks serve only one specific region of the country. However, the merger of Allahabad Bank (having a presence in East & North region) with the Indian Bank (having a
presence in South) increases its geographical spread.
Slowdown in Economy: The move is a good one but the timings are not just apt. There is already a slowdown in the economy, and private consumption and investments are on a declining trend. Hence, there is a need to lift the economy and increase the credit flow in the short-term, & this decision will block that credit in the short-term.
Weak Banks: A complex merger with a weaker and under-capitalized PSB would stall the bank’s recovery efforts as the weaknesses of one bank may get transferred and the merged entity may become weak.
The potential failure can impact other institutions or banks and the financial sector, and which could have a contagion effect and erode confidence in other banks. A case in point is the recent instance of IL&FS Group, which defaulted on repayments hitting many lenders and investors.
 The possible creation of what is known as systematically important institutions, or those too big to fail, leading to the prospect of bailouts in the future, which could hurt the government and financial stability. 

Way Forward
 Dual regulation by the Ministry of Finance and RBI on PSBs often results in paralysis in decision making – which makes consolidation of banks a redundant measure if they are not given the power to act swiftly, as pointed by PJ Nayak.
 Governance of public banks needs to be improved before making any significant change in any emerging architecture.
 The long-term solution outlined by Raghuram Rajan, former RBI Governor, mentioned in his note to the estimates committee of Parliament: ‘Improve governance of public sector banks and distance them from the government’ and ‘delegate appointments entirely to an entity like the Banks Board Bureau’, should be taken up for discussion.
 Also, unless there is a change in the operating structures, mergers will only be symbolic and may not deliver the desired results in the long run. Counter intuitively, if we are willing to change the way in which public sector institutions function by giving them autonomy along with accountability, we may not require such mergers.
 The creation of more large-sized banks will mean the RBI will have to improve its supervisory and monitoring processes to address increased risks.

The creation of large banks to meet the requirements of the economy is a necessity. But, it is more important for the government to address the core issue impacting the Banking Sector, that is, of Governance.

23 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Anmol
Anmol
3 years ago

Please review and revert

Anmol
Anmol
3 years ago
Reply to  Anmol

Please review Sir!
MOJO9902Y00D71079365

Wasim
Wasim
3 years ago

Pls review
Payment ID – MOJO9731S00A34242506

New Doc 2019-09-02 23.30.44_1.jpg
New Doc 2019-09-02 23.30.44_2.jpg
New Doc 2019-09-02 23.30.44_3.jpg
Sumona Dey
3 years ago

MOJO9727T00D60304985

sahithya kasiraju
sahithya kasiraju
3 years ago

Payment ID: MOJO9802W00A98715356
Please review

bank_1.jpg
bank_2.jpg
bank_3.jpg
Amandeep Kaur
Amandeep Kaur
3 years ago

IDMOJO9728J00A50299555

15675648357001495259629625698531.jpg
15675648573527634583580370280789.jpg
15675648787157885128469320093988.jpg
pranab prakash
pranab prakash
3 years ago
Ashraf Ali
Ashraf Ali
3 years ago
Murari Jha
Murari Jha
3 years ago

MOJO9731E00D34250209

Kanchan Prakash
Kanchan Prakash
3 years ago

Payment ID: MOJO9731Y00N34245077

15676928592387439435420603641153.jpg
15676928739908023587137665156469.jpg
Akankhya Behera
Akankhya Behera
3 years ago

Payment ID – MOJO9903H00A58015579

Abhigyan
Abhigyan
3 years ago

MOJO9903Q00A58015795

Yogeshkumar Prajapati
Yogeshkumar Prajapati
3 years ago

Mojo id-MOJO9908R00A36163556