Merger of Public Sector Banks in India Explained

Some major problems are discussed below:

1-Bad loans: 

• Nearly Rs 10 lakh crore, India’s pile of bad loans is bigger than the gross domestic products of least 137 countries.
• The share of gross NPS  in India could inch up to 10.2% by March 2018, from 9.6% in March 2017, according to the fiscal stability report.
• In September 2016, gross NPA were at 9.2%.
• Presently, the worst-hit are the state owned banks, which dominate the Indian banking system.
• In March 2017, the average bad loans of PSBs stood at 75% of their net worth.
• Bad loans are squeezing banks profitability and capital position, threatening the health of some of India’s biggest banks.

 

2-Cyber threats:

• An estimated 95% of transactions in India are paid for in cash but with the growing penetration of computers, increasing access to the internet, Indians are taking to digital channels for their banking needs. Cybercrime is becoming a greater threat as a result.
• The bank frauds like transactions involving cheating, negligence, misappropriation of funds, and forged documents.
• The global ransomware attack is one of the examples of cyber crime that affected the computer system of governments and several companies in various countries including India.

 

3- Bank Fraud:

• Another pressing concern for the banking regulator is the increased number of fraudulent transactions at Indian banks.
• In the last five years, the volume of bank fraud has increased by 19.06% to 5,064 cases.
• The biggest challenge faced by the PSBs is the rising NPA and will full defaulters and corruption in the system.

 

What will be the implications of the merger?

1-       Positive impact of the merger:

• It will help in reducing the dependency on the public exchequer.
• If these banks are merged, a bulk of the businesses in the central region will continue to be concentrated with the merged entity.
• The merger will ensure more bargaining power and better room for negotiations with borrowers for the merged banks.

 

2-       Negative impact of the merger:

• The merger will affect regional focus.
• Immediate negative impact of the merger would be from pension liability provisions (due to different employee benefit structures) and harmonization of accounting policies for bad loans recognition.
• Mergers will result in shifting and closure of many ATMs, Branches and Control offices, as it is not economical to keep so many banks concentrated in several pockets especially in urban and metropolitan centers
• The merger will result in immediate job losses. This will worsen the unemployment situation further and may create law and order situation and social disturbances
• New power centers will emerge in the changed environment.
• Merger will result in clash of different organizational cultures
• The weaknesses of the small banks may get transferred to the bigger banks
• When a big bank books huge loss, there will be a big jolt in the entire banking system and its repercussions will be felt on every stakeholder.
• Presently, India needs more banking competition rather than more banking consolidation. India needs more banks rather than fewer banks.

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