Photo by Ayaneshu Bhardwaj on Unsplash

Background

Merger of Public Sector Banks (PSB) is way back into news and action from 1990-91 when "Narsimhan committee", along with the LPG reforms, recommended the "Merger of banks", as a major banking sector reform. In July 2017, a mega-merger of SBI and its subsidiaries took place and recent merger of Bank of Baroda, Vijaya Bank and Dena Bank was recommended and implemented. The merger of banks is often viewed as a step "to strengthen a Weak Bank". Recently Finance Minister Ms. Nirmala Sitharaman announced a big consolidation of 10 public sector banks to be merged into four as part of ongoing financial reforms.

Banks merger: Complexities involved to the General Public

The merger of banks combines a weak bank with a relatively stronger bank to improve its financial sustainability. It also creates a wider customer base, thus preventing the shutdown of banks due less number of footfalls. It also improves RBI's control over banks, thus enabling proper supervision.

The aim of creating an Indian bank that will in an international league of giants is there since the early 1990s.

In 2017, post the merger, the SBI was in the process to rationalise its branch network by relocating some of its branches to reach the maximum number of people. The SBI believed that such a move would help it optimise its operations and also benefit profitability. In 2018, Rating agency Fitch said the merger of the three banks could bring about material operating efficiencies over a period of time by lowering the combined operating costs, stronger risk management practices, etc. There are also voices who said that because of this merger, Bank of Baroda, the best among the three, would have to share a baggage on its shoulders.

However, the merger of banks is a "double-edged sword".

The merger of the banks may or may not be convenient for the customers as they are unlikely to adopt to new management. Also, the merger may create a "Conflict of Interest" among the Horizontal level employees. In the short run, mergers may create a temporary disruption in the financial growth of the participating banks, which in turn may lead to "temporary unemployment" in the banking sector.

However, in the long run, the merger acts a lifeline for a weak bank and prevents it's bankruptcy. It also lowers the overall liabilities and increases the overall assets (Both human and infrastructure), thereby creating a consolidated bank having a strong and firm root.

In a merger of Public Sector Banks,

  1. Sum of total of customers, infrastructure, NPA, cash flow, and staff will be apparently larger but there will not be any change in the actual figures of individual banks.
  2. It is exactly like putting many people's food in a single large dish spending a cumbersome process without much health benefit unless working guidelines comprising all banks are streamlined in operations.
  3. Local and familiar banks are more, fast and easily accessible to average customers; but customers hesitate to approach the big merged corporate bank. Average farmers even don't dare to enter such luxurious look banks unless faithful someone accompany with them. However, educated rural & urban youth benefited lot from mudra loan schemes from the banks. It was very successful due to the elastic attitude in disbursing, renewal and recovery of loans. Benefits of the scheme shall be reflected in growth in the coming few years. Similar elasticity will help for growth of medium business companies who enhance their business in multiple phases on the line of past progressive performances only.
  4. Few years of staff efficiency could reduce in worry of losing their jobs. To avoid this clear-cut policy must be known to them. Reducing staff will save salary amount but have to compromise with unemployment aggravation. In recent years delays in work attributed to reduced staff by many merged banks.
  5. History shows that links of village-level Kisan Sahkari Societies to District co-operative banks to Nationalised Banks are most useful to the average person due to well relay relations with bank staff. lt is also beneficial for loan recoveries on elastic terms. Well, linking these with nationalised banks or converting them as tail part of the banks shall help lot to the rural population. Rural population's active participation in money in and out flow can have huge positive impact on GDP.
  6. Post merged Banks opt for stringent measures for recovery of loans. The sick industrialist frightened to face stringent measures to recover loans hesitated to execute expansions, reduce or stop production to clear available stock to revolving funds. The industries at turnaround points get paralyze and collapse. It results in loss or interrupted employment & mental sickness in workers families. The circumstances may reduce the efficiency of many all-well industries worker developing phobia of job loss. In total ultimately it results in a slowdown of economy.
  7. However, if staff and officials of merged units got briefed repeatedly about these micro facts in trainings, the mergers can work at par to customer & economy-friendly efficient banks provided they follow well-designed standard operating guidelines helpful not only to banks but also to customers.

ADVANTAGES AND DISADVANTAGES OF BANK MERGERS: PERSPECTIVE

The advantages are:

  • It reduces the cost of operation.
  • The merger helps in financial inclusion and broadening the geographical reach of the banking operation.
  • NPA and risk management are benefited.
  • Merger leads to the availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more in small banks.
  • The disparity in wages for bank staff members will be reduced. Service conditions get uniform.
  • The merger sees a bigger capital base and higher liquidity and that reduces the government's burden of recapitalising the public sector banks time and again.
  • Redundant posts and designations can be abolished which will lead to financial savings.

The disadvantages of merger:

  • Many banks have a regional audience to cater to and merger destroys the idea of decentralisation.
  • Larger banks might be more vulnerable to global economic crises while the smaller ones can survive
  • Merger sees the stronger banks coming under pressure because of the weaker banks.
  • Mergers could only give temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks
  • Coping with staffers' disappointment could be another challenge for the governing board of the new bank. This could lead to employment issues.

Salient features of recent mergers and conclusion

The recent decision of the government to merge 10 public sector banks to create four bank entities, thus, reducing the number of public sector banks from 27 to 12 has wide implications on General Economy.

Contrary to propaganda of universal financial inclusion, this will lead to further exclusion of crores of Indians. India is already one of the most unbanked countries in the world. This move will further push the small savings in rural India into the clutches of sleazy chit-fund operators and financial mercenaries.

Weakening public sector banking is meant to facilitate the privatisation of the nationalised banking sector. The merger will lead to the shrinkage of the network of branches denying accessibility, particularly in rural India. After the merger of the five associate banks with the State Bank of India, around 1,000 branches were closed. It is reported that the merger of Dena Bank and Vijaya Bank with Bank of Baroda will result in the closure of 800 branches.

The justification of the government for the merger of banks is that they will get strengthened and bigger banks will emerge. However, the government policy is to disinvest and lower the State’s equity in these banks and bring them down below 50 per cent. After setting up of big banks, this process of privatisation is proposed to be undertaken.

The government is also covering up the reasons for the problems the public sector banks face. Huge non-performing assets have piled up because of large-scale defaults by big corporate houses and the failure on the part of the government to ensure recovery of these huge loans. NPAs have risen four fold in the past five years and at least Rs 5.5 lakh crore of loans written off to cronies since 2014. The public sector banks are being forced to give up a substantial part of the debt through the Insolvency and Bankruptcy Code process. The merger of the banks will not solve the problem of recovery of these loan amounts.

This year marks the 52nd anniversary of the nationalisation of banks. Instead of strengthening the public sector banking system, in people’s interest, the present Government is set upon dismantling it. This must be rationally handled by the concerted action of bank employees, the trade unions, and all the democratic forces working together.

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