GS-III: Mergers of Bank

Context

The Centre announced a mega amalgamation plan, the third in a row, that merged ten public sector banks into four larger entities, this series of mergers the number of state-owned banks is down to 12 from 27.

About Merger:

• There are four new sets of mergers Punjab National Bank, Oriental Bank of Commerce and United Bank of India to merge to form the country’s second-largest lender.
• Canara Bank and Syndicate Bank to amalgamate; Union Bank of India to acquire Andhra Bank and Corporation Bank, and Indian Bank to merge with Allahabad Bank.
• The biggest merger out of the four was Oriental Bank of Commerce and United Bank merging into Punjab National Bank to create the second largest state-owned bank with Rs 17.95 lakh crore business and 11,437 branches.
• These three banks are technologically compatible as they use Finacle Core Banking Solution (CBS) platform.

How does it help the government?

• For decades starting from 1992, the government as the biggest shareholder of over 25 banks had to provide capital for them.
• To grow and lend more, the banks often need a higher amount of capital to set aside also for loans that could go bad.
• With the government not willing to lower its equity holdings and with a large slice of the capital is set aside to cover for bad loans, the burden of infusing capital rests on the majority shareholder.
• This means marking a large amount of money almost every year during the last few years in the Budget for capital infusion at many banks at a time when there is a huge demand for the social sector.
• By reducing the number of banks to a manageable count, the government hopes that the demands for such capital infusion will be lower progressively with increased efficiencies and with more well-capitalised banks.

How have previous bank mergers fared?

• Last year, the government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country.
• The government said this merger has been “a good learning experience” as profitability and business of the merged entity has improved.
• Earlier, the State Bank of India had acquired its associate banks.
• Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab and Sind Bank, which have a strong regional focus, will continue as separate entities.

Will this help improve the performance metrics now?

• While the announced consolidation of PSU banks is a credit positive as it enables the consolidated entities to meaningfully improve scale of operations and help their competitive position.
• At the same time, there will not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles.
• While asserting that bank consolidation is a good move toward improving the efficiency of the PSBs, he said “it is possible that the current mergers may face more friction than the last one with BoB, Dena and Vijaya”.
• In that case, a large, well-capitalised strong bank absorbed two much smaller entities.
• In the present case, the mergers are mostly among larger banks, with absorbing bank not necessarily in strong health.