Banking Sector Reforms

[op-ed snap] A big bank theory that won’t suffice

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Bank merger

Mains level : Bank mergers in the background of growth slowdown

CONTEXT

India’s GDP growth slumped for the fifth straight quarter to 5%, a six-year low. 

Background

  1. India is faced with job losses, the absence of fresh employment opportunities, farm crisis, a severe investment drought, and the financial sector’s myriad malaises. 
  2. This has resulted in sluggish aggregate demand and slowing growth.
  3. The government announced four mergers among public sector banks (PSBs). It involves 10 banks and reduces the total number of state-owned banks to 12.

Problem with the move

  1. Will it reverse the slowdown? 
  2. At this time, lenders have become lending-averse and bankers are wary of witch-hunts over commercial judgment calls.
  3. Mergers of this scale are likely to focus on institutional and professional energies on executing these unifications successfully.
  4. It could detract attention from the critical task at hand of identifying unmet credit needs and keeping India’s loan pipelines humming. 
  5. In terms of the other governance reforms announced for PSBs, the government did not distance itself from the appointment of chairpersons and managing directors.
  6. Of the three PSBs based in Kolkata, two—Allahabad Bank and United Bank of India—will lose their identities and be subsumed into other larger banks, leaving the city as the home base of only one PSB (UCO Bank) and the private lender (Bandhan Bank). 
  7. The government has not provided a rationale, or eligibility criteria, for its selection of PSBs.
  8. At a strategic level, the merger will partially ease pressure on government finances from the over-sized bank recapitalization bill.
  9. It is unlikely to set a credit supply rolling. The government allocated a mere ₹70,000 crore in this year’s budget.

CONCLUSION

The mergers are unlikely to generate any immediate benefits for the economy in the absence of appropriate government spending.

 


Back2Basics

Merger of Banks: Need & Challenges

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