FM Sitharaman announces merger of public sector banks

The aim of this massive consolidation is to reduce the banks’ lending cost, check NPAs and increase the merged banks’ operational stability, which will provide synergy benefits and improve profitability.

Aug 31, 2019 04:08 IST India Infoline News Service

Nirmala Sitharaman
In continuation with last week's reform announcements, FM Nirmala Sitharaman addressed the press to give updates on the second instalment of revival measures amid the economic slowdown. The Finance Minister outlined measures taken by the Modi government to "fundamentally reboot" functioning of PSU banks in the press conference.

The primary objective of this amalgamation is to improve the customer base, consolidate the public sector banking space and enable the merged entity to compete at global banking level. The aim of this massive consolidation is to reduce the banks’ lending cost, check NPAs and increase the merged banks’ operational stability, which will provide synergy benefits and improve profitability.

Government has announced a series of PSU Banks merger in order to get the synergies and operational benefits out of these banks.

Four PSU bank mergers have been announced (1) PNB + Oriental Bank of Commerce + United Bank, (2) Canara Bank + Syndicate Bank, (3) Union Bank + Andhra Bank + Corporation Bank, and (4) Indian Bank + Allahabad Bank. In order to provide growth capital to 10 PSU Banks, they have been given recapitalization amount of Rs52,250cr out of the Rs70,000cr announced in the Union Budget FY19-20. 

Rajnish Kumar, Chairman, SBI said, “today’s announcements on bank mergers is a cohesive and a clear recognition that bigger banks have that much more ability to absorb shocks, reap economies of scale as well as the capacity to raise resources without depending unduly on the exchequer. Today’s announcements also underline the fact that the government recognizes the importance of a robust banking system in achieving the goal of $ 5 trillion economy as bigger banks will be better armed to meet the credit needs of a fast-growing economy like ours.

The decision to have a separate mechanism for sanctioning and monitoring of big loans will ring-fence the Banks against potential frauds.

Further, the decision to empower Bank Boards and operational flexibility in hiring from the market will prioritise robust risk management practices in decision making”.

Prakash Agarwal, Head- Financial Institution, India Ratings and Research (Fitch Group) said, “Bank consolidation is a good move from the government is a step towards improving the efficiency of the PSBs. Specifically, the measures announced to improve corporate governance and grooming leadership, if followed through with right intent, resources and commitment, can go a long way in addressing the challenges that PSBs has been facing historically. 

Having said that, 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-capitalized 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.  However, given the merged banks are on a similar technology platform, the integration should be smoother. Also, it is likely that management attention and bandwidth of the entities being merged could get split impacting the loan growth and reduce the focus on strengthening asset quality in the short term.”

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