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RSTV: THE BIG PICTURE- BIG BANK REFORMS


RSTV: THE BIG PICTURE- BIG BANK REFORMS


Introduction:

            Half a century after the nationalisation of banks , the centre govt has now announced a mega plan to merge 10 public sector banks in to four large entities . This will bring down the total number public Sector Banks in the country to 12 from 27 in 2017. Punjab National Bank, Oriental bank of commerce and United Bank of India will merge to become the second largest bank after SBI. Canara Bank and Syndicate Bank merger will create 5th largest lender of the country and the merger of Union Bank, Andhra Bank and Corporation Bank will create 6 largest Bank. Announcing this merger plan Finance Minister said this will help in consolidating strong national presence and global reach of these banks. This was followed by 55000 crore rupees recapitalisation plan for the merged entities and 6 other banks enabling them to enhance their lending capacity.

 

What is the mega merger plan?

  • A situation in which two banks pool their assets and liabilities to become one bank. Because this can have a significant impact on the financial industry, the Federal Reserve subjects mergers involving bank holding companies to more intensive regulation.
  • Bank of scale which would enable India to meet its aspiration of 5 trillion economy.
  • If we aspire than we need industries, entrepreneur in those industries and credit.
  • As economy will grow we even need bank to keep pace.
  • It is seen as an attempt to revive a relatively weaker bank with two healthier on
  • The success of this merger, according to analysts, is crucial for future such attempts.

 

Need for Consolidation:

  • PSBs are fragmented, especially in comparison with other key economies.
  • The merger will enable the government to pay closer operational attention to the enlarged institution.
  • To protect the financial system and depositors’ money.
  • To build capacity to meet credit demand and sustain economic growth.
  • The need to bridge geographical gaps.
  • In 1991 Narasimham Committee suggested that India should have fewer but stronger PSBs.

 

Positives:

  • Capital will be higher when merged together and will give a feeling of a stronger bank.
  • Large banks with larger lending capacity.
  • It will provide efficiencies of scale and help improve the quality of corporate governance for the banks.
  • Improvement in operational efficiency.
  • Cost of funds for the merged entity is expected to come down.
  • Bigger banks can attract more Current Account, Savings Account (CASA) deposits.
  • Banks will have the capacity to raise resources without depending on the State exchequer.
  • Improve the capacity of the banking system to absorb shocks that the markets may cause to it.
  • Technical inefficiency is one of the main factors responsible for banking crisis. The scale of inefficiency is more in case of small banks. Hence, merger would be good.
  • Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
  • This will also end the unhealthy and intense competition going on even among public sector banks as of now. In the global market, the Indian banks will gain greater recognition and higher rating.
  • The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
  • The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
  • Mergers make sure there is common unifying messaging.

 

Challenges:

  • Merger will affect regional flavour and end regional focus.
  • The argument that size is going to determine the future of the bank in a globalised scenario is facile. Remember the fate of large global banks, which collapsed during the global financial crisis? On the contrary, small banks have survived the crisis due to their nimbleness and the niche areas they operate in.
  • Immediate negative impact would be from pension liability provisions (due to different employee benefit structures) and harmonisation of accounting policies for bad loans recognition.
  • There are many problems to adjust top leadership in institutions and the unions.
  • Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
  • The weaknesses of the small banks may get transferred to the bigger bank also.
  • New power centres will emerge in the changed environment. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
  • When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
  • Also, India right now needs more banking competition rather than more banking consolidation. In other words, it needs more banks rather than fewer banks. This does not mean that there should be a fetish about small-scale lending operations, but to know that large banks are not necessarily better banks.
  • Integration of technology platforms and cultures of these organisations.
  • The quantum of Gross NPA (GNPA) cannot change and will still have to be addressed.
  • Mergers are not the panacea in the context of PSBs

 

What should be ensured by the government?

  • The government shall not have any hidden political agenda, in bank mergers.
  • All stakeholders are taken into confidence, before the merger exercise is started.
  • After mergers, shares of public sector banks shall not be sold to foreign banks, foreign institutions and Indian corporate entities, beyond certain limit.
  • Whenever further divestment (dilution of government holdings) takes place, the government share holdings shall not fall below 51% under any This will ensure that the ownership and control of public sector banks remain with the government.
  • The central government shall not rush through the process of bank mergers.
  • The decision with regard to selection of smaller/weaker banks for merger with larger/stronger banks is to be taken carefully and grouping of various banks for this purpose is the key issue involved. The government shall not yield to pressure from any political or social groups.
  • The acquiring bank shall not attempt to dominate or subsume the acquired bank. Good aspects of both the banks before merger shall be combined, in order to instil confidence in all stakeholders and to produce better results.
  • Personnel absorbed from the smaller bank shall undergo brief, intermittent training programs to get acquainted with the philosophies, processes and technology in the new environment. The management must be ready with a good roadmap for this and allot considerable budgetary resources for this purpose.
  • There shall be conscious and organized efforts to synthesize the differing organizational cultures, for the mergers to yield the desired results.

 

Conclusion:

  • Over the years economy has grown steadily, banking reforms have been steady and now it is the time for transformative change.
  • Merger is a good idea but should be carried out with right banks for right reasons.
  • Without addressing the governance issues in the banks, merging two or three public sector banks may not change the architecture.
  • Need proper management structure and selection of impactful CEO’s.
  • Merger only doesn’t improve performance matrix, it should happen with the package of many other things like having additional capital.
  • For economic growth to happen huge companies need credit and capital so actually mergers should have happened few years earlier.
  • Piecemeal consolidation will not provide a lasting solution and what is required is an integrated approach from all stakeholders including the government.

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