Merger of Public Sector Banks
Posted on : 08 Oct 2019Views: 1978
BJP government’s decision to merge 10 public sector banks (PSBs) into four entities and introduce bank governance reforms considered as a very big move in the history of banking in the country. Though the move is claimed to streamline and improve these PSBs, there are mixed reactions from several quarters from the banking sector and general public.
What about the mergers ?
The merger of Punjab National Bank with Oriental Bank of Commerce and United Bank - this makes it the country’s second-largest Public Sector Bank. Canara Bank and Syndicate Bank becomes one; Union Bank of India, Andhra Bank and Corporation Bank will merge; and so will Indian bank and Allahabad Bank. The business is around Rs 56 lakh crore. Banks with large financial scale, the government says that this bold move will build a strong USD 5-trillion economy.
Benefits of Merger
Some of the important benefits of mergers: 1) Enhanced capacity to increase credit line to bigger projects. 2) Large network of banks and its branches will ensure strong national presence and including global reach in all the countries. 3) Easy to adapt and enhance NextGen technology for banking. 4) It offers the banks to better their ability to raise resources from financial markets. 4) Strong centralisation of the banks will indirectly increase the operational efficiency gains will reduce cost of lending. 5) Helps in offering focussed customer service and global expansion opportunities.
What are governance reforms ?
Governance reforms mostly focusses on making the management accountable to the bank board. A board committee will appraise and assess the performance of executives (general managers and higher authorities). Boards have been given flexibility to introduce a CGM (chief general manager). A chief risk officer, to be recruited from outside and he will be offered market-linked compensation to attract the best talent. A risk management committee will be formed and will be given a mandate to fix accountability for compliance of the risk appetite structure. Boards of large PSBs will have opportunities to avail to offer advisor fees of non-official directors (NODs). NODs will perform a role similar to the independent directors.
Problems of NPA
While merger and bank governance reforms look very attract. The problem of non-performing assets (NPAs) haven't been contained. In March this year, NPAs were Rs 7.9 lakh crore. At the same time, PSBs continue to be revenue grabbers ; in the last fiscal alone, the union government spend over Rs 1 lakh crore in the form of recapitalisation. We are aware of the fact that non-business considerations are often taken into importance. So cronyism, unaccountability, unplanned loan melas, will result in rise of non performing assets.
Dangers of Mergers
PSB Banks become bigger when merged, and this doesn't mean stronger banks. If one weak bank is merged with another weak bank, the resultant bank is also weak. Besides, if one weaker is merged with a strong bank, the resultant bank will be less strong. More importantly big banks always have big risks. That is bigger the risk, bigger the dangers. In a multicultural and multi regional country, we need stronger banks and not large banks. Since bank contains money of common man. One should not take bigger risk with the common man's money.
A democratic government should always prioritises on the revival of economy. Since banks are extremely important in economic survival and revival and they need to focus on pushing economic development in various sector. But instead, due to this merger, the banks are going to be tied up in merger activities for the next 9-12 months. This will result in rising confidence of bankers, but the recovery department will not worry about the works since they might think because their banks will anyway merge with some other bank. Besides, it is unfortunate and dissappointing that the decision makers in the government continue to ignore experts opinions, group discussions with public sector banking. The recent decision announced may look like one miracle medicine for all problems in the banking problems, but there is a critical difference between treatment and cure.