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DAILY NEWS ANALYSIS

  • 24 September, 2019

  • 3 Min Read

Making the grand India PSB mergers work

GS-III: Making the grand India PSB mergers work.

News

The initial enthusiasm of market analysts to the bank merger announcement is giving way to wariness and scepticism.

Procedure of Bank Merger

  • An application for merger is submitted by the concerned banks to the Central Registrar of Cooperative Societies (CRCS).
  • A copy of the application is also sent to Reserve Bank of India (RBI) along with valuation report and information relevant for consideration of the scheme of merger.
  • The RBI then examines the scheme in respect to the interests of depositors and conveys its decision to the CRCS.

What is the rationale behind the mergers?

  • It was the Narasimham Committee in the late 1990s that recommended consolidation through a process of merging strong banks.
  • There are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand.
  • Given this, the biggest plus of the mergers is that they will create banks of scale.
  • According to the government, banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform.
  • But the move marks a departure from the plan to privatise some of the banks or bringing in strategic investors to usher in reform in the sector.
  • The government has decided amalgamation as the “best route” to achieve banking sector scale.
  • This is also expected to support the target of achieving a $5 trillion economic size for India in 5 years.
  • However, mergers may not lead to any immediate improvement in their credit metrics.

How effective could the merger be?

  • Bank consolidation is a good move towards improving efficiency of the PSBs.
  • This would enable the consolidated entities to meaningfully improve scale of operations and help their competitive position.
  • Given that the merged banks are on similar technology platform, the integration should be smoother.
  • However, there may not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles.

What are the challenges and priorities now?

  • Mergers are driven by synergies in products, business, geographies or technology and the most important, cost synergies.
  • There may be some geographical synergies between the banks being merged now.
  • But unless banks realise cost synergies through branch and staff rationalisation, the mergers may not mean much to them or to the economy.
  • This is where the government’s strategy becomes significant.
  • Evidently, public sector banks are overstaffed.
  • But the key reforms to be made are at the board level, including in appointments, especially of government nominees.
  • These are often political appointees, with little exposure to banking.

Way forward:

While such consolidation can result in handsome productivity gains, what matters is the quality of execution by at stable and committed leadership aided by a shrewd and benign ownership.

Source: THE HINDU


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