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What are the laws related to the merger?
- The Banking Companies (Acquisition and transfer of undertakings) Act, 1970 deals with the merger of banks.
- The act to provide for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage, and organization, in order to control the heights of the economy.
- The objective of this act is to meet needs of the development of the economy in conformity with national policy and objectives and for matter connected therewith or incidental thereto.
What are some international examples?
- In the US, the government has capitalized banks to the extent of $2,270 billion after the 2008 global financial crisis.
- In China, the government helped the banks with capital to the tune of more than $120 billion when they faced problems.
- Two years ago, in Russia, the government pumped $15 billion into banks.
- In Greece, it was $63 billion and in Spain $51 billion when their banks were in trouble.
Has the merger been tried before?
- This is not the first time that the idea of merging the Public Sector Banks has gained momentum.
- In 1991 report on banking sectors, M. Narasimham, a former Reserve Bank of India governor, had recommended mergers to form a three-tier structure with three large banks with an international presence at the top, eight to 10 national banks at tier two, and a large number of regional and local banks at the bottom.
- Further P.J. Nayak Committee had also suggested that state-run banks should either be merged or privatized.
- The SBI first merged State Bank of Saurashtra with itself in 2008.
Recent mergers:
- The country’s largest lender State Bank of India (SBI) merged with its associate banks in April this year.
- Earlier this year, the government had approved the merger of SBI’s five associate banks with itself. In March, the Cabinet also approved the merger of Bharatiya Mahila Bank (BMB) with SBI, catapulting the country’s largest lender to among the top 50 banks in the world.
- State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT), besides BMB, were merged with SBI.
- With the merger, the total customer base of the SBI reached around 37 crores with a branch network of around 24,000 and nearly 59,000 ATMs across the country.
Conclusion:
The government needs to focus on consolidating the huge deposit available with the PSU Banks. India being a savings focused banking system, a regional approach to consolidation of banks may be a fruitful exercise and could address the issue of NPA in the long run.