Mega Banks Merger – A Step Towards $ 5 Trillion Economy
Narsimhan Committee of 1991 recommended Structural Reorganizations of the Banking sector suggesting actual numbers of public sector banks need to be reduced. Narsimhan Committee in 1998 recommended for merger of strong banks which will have ‘multiplier effect’ on the industry. It had also suggested to three-tiered structure of banks – international, national and regional. Similarly, P J Nayak committee of 2014 had suggested for merger of the PSBs.
However, it was only in May 2016 that effective action to consolidate public sector banks began to be taken by Modi government. For example, amalgamation of six banks into the State bank of India. The merger was completed in record time, unlike earlier mergers of State Banks of Indore and Saurashtra.
Strong foundations laid through Financial Sector Reforms
Reforms is an ongoing endeavour. Strong foundations are laid through Financial Sector Reforms such as
- Doing away with ‘phone banking’ with no interference in commercial decisions.
- Earlier there was restructuring of stressed assets often without actual resolution. Now, resolution is through Insolvency and Bankruptcy Board of India (IBC) where connected party is debarred.
- Techno-economic valuation with valuation cells created in banks.
With such reforms, as Finance Minister informed, there is almost double recovery by banks from ₹ 61,930 cr (FY 17) to ₹ 1,21,076 cr (FY 19). With improved asset quality, Non-performing Assets (NPAs) are down by ₹ 1.06 lakh cr between March 2018 to March 2019. Profitability of PSBs has enhanced. Now, 14 PSBs are in profit in contrast to just two in FY 18. Moreover, Provision Coverage Ratio, provision made against bad loans from the profit generated, is highest in seven years (as on March 2019).
With these strong foundations, merger of the banks is the logical step towards larger structural reforms pending for almost two decades.
Rationale behind merger of banks
Modi government has set the path of structural reforms to make Indian Economy to $ 5 trillion by 2024 from $ 2.6 trillion in 2017. Banks are prime lenders for MSMEs, industries etc to fuel growth. With credit to the Indian economy approximately 72% of GDP ($ 1.9 trillion), it needs commensurate credit growth by banks. Thus, strong banks with scale, more lending capacity using cutting edge technology are imperative for $5 trillion economy.
Benefits of bank merger
There are wide ranging benefits of the bank merger. Big banks can have strong national presence and global reach with thrust on NextGen technology for banking. Enhanced risk appetite of big banks fuels growth.
It also helps for wider offerings, enhanced customization with operations rationalized. It allows for redeploying of admin staff for business, best of employees benefit without retrenchments. Operational efficiency gains to reduce cost of lending.
With unlocking of potential, bank merger poises banks for rapid growth, sets them for market raising apart from bringing them on high profit trajectory.
Such gains are visible from earlier amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank. For example, merger of these three banks witnessed robust Current Account and Savings Account (CASA) growth of 6.9% along with strong retail loan growth of 20.5% between June 2018 to June 2019.
Salient features of the recent announcements: scale and synergy
- Banks are chosen based on core banking solution (CBS) they use, synergy and cultural affinity to enable quick realisation of gains; not on traditional geographical view for merger of banks. It will ensure no disruption in their activities, ensure greater reach and improved CASA.
- Number of PSBs will be reduced to 12 from 27 in 2017.
- It brings ₹55,250 cr. upfront capital for credit growth & regulatory compliance.
- Specialised risk officer from market to be appointed; more power will be given to boards with merger.
Thus, consolidated Next Gen PSBs with strong regional focus, better national presence and global reach amount to 82% of PSB business and 56% of commercial bank business. Modi government is trading the path towards ₹ 5 trillion economy through reforms, financial strength, technology, consolidation & strong governance.