Merger of Public Sector Banks in India Explained

What are the effects of the merger on different stakeholders?

Implications on different stakeholders:

1-       For Banks:

• The merger will help in dealing with the problem of stressed assets.
• Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
• Mergers help many PSBs, which are geographically concentrated, to expand their coverage beyond their outreach.
• A better and optimum size of the organization would help PSBs offer more and more products and services and help in the integrated growth of the sector.
• Consolidation also helps in improving the professional standards.
• In the global market, Indian banks will gain greater recognition and higher rating.
• The volume of inter-bank transactions will come down,  it will result in saving of considerable time in clearing and reconciliation of accounts.
• This will help in reducing unnecessary interference by board members in daily business of the banks.
• After mergers, bargaining strength of bank staff will become more visible. Bank staff may look forward to better wages and services conditions in future.
• The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.

 

2-        For economy:

• The merger benefits include getting economies of scale and reduction in the cost of doing business.
• Technical inefficiency is one of the main factors responsible for banking crisis
• The scale of inefficiency is more in case of small banks. Hence, the merger would be good.
• The size of each business entity after the merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
• After the merger, Indian Banks can manage their liquidity – short term as well as long term. Thus, they will not be compelled to resort to overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
• The synergy of operations and scale of economy in the new entity will result in savings and higher profits.
• A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.
• Customers will have access to fewer banks offering them a wider range of products at a lower cost.
• Mergers can diversify risk management.

 

3-       For government:

• The burden on the central government to recapitalize the public sector banks on regular basis will come down substantially.
• This will also help in meeting more stringent norms under BASEL III, especially capital adequacy ratio.
• From a regulatory perspective, monitoring and control of less number of banks will be easier after mergers.

 

What should be ensured if the merger is carried out?

• A regional approach to consolidation. If the banks are consolidated region-wise, the post-merger rationalization could reduce operating costs for the merged entity, without compromising on the deposit base.
• With a new format of banking emerging in the form of small finance banks(SFB) and payment banks, PSBs need to think of alternatives to retain and strengthen their deposit base.
• The government shall not have any hidden political agenda, in bank mergers. The government shall not rush through the process of 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 circumstances
• This will ensure that the ownership and control of public sector banks remain with the government
• The decision with regard to the selection of smaller/weaker banks for the merger with larger/stronger banks is to be taken with due care 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
• Personnel absorbed from the smaller bank shall undergo a brief, intermittent training programs to get acquainted with the philosophies, processes, and technology in the new environment.
• There shall  be organized efforts to synthesize the differing organizational cultures, for the mergers to yield the desired result
• Huge amount of planning would be required to make the consolidation process smoother
• An integrated approach from all stakeholders including the government is needed.

 

What are NPA’s?

• A nonperforming asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• A loan is an asset for a bank as the interest payments and the repayment of the principal amount create a stream of cash flows.
• It is from the interest payments than a bank makes its profits.
• Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as the past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing