Photo by Ayaneshu Bhardwaj on Unsplash
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.
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.
The advantages are:
The disadvantages of merger:
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.