Merger of Banks

Banks are the institution responsible for the socially justified liquidity of cash. The rising NPAs (non-performing assets) have raised questions on the PSBs. There is a need felt for the radical restructuring of the PSBs in India. To improve financial health three treatments can be accomplished for it — amalgamation, reconstruction and winding up.

Although winding up is an option only when banks are at a stage of total exhaustion. Amalgamation i.e. merging is the most practised one. It leads to an expansion in customer base and operations, rise in efficiency and quick completion of growth goals. Risks decrease, as the infrastructure for risks gets developed. Business gaps and product gaps can be filled.

Experts have had a continuous demand for fewer but healthier PSBs. There are as many as 21 PSBs operating in India. Many PSBs in India have close proximity in an area with same customers and similar products and strategy. If two PSBs with similar structure are merged then though monopoly may come into play and difficulty would arise in predatory behaviour but there are solutions for that. The strong management team would be a benefit. Employment will decrease, but with cost falling, profits will tend to increase.

Many perceive 4–5 big banks optimum but speculations are that the government is planning for 10–12 PSBs due to the diversity of India and the toil which will be faced off in the execution of merging. The road will not be smooth in the inceptive stage of the merger because of the paperwork and integration of facilities. Attention should not be distracted on management integration over NPA resolution. This is often seen as a drawback for mergers but there is a need for a tough call for long-term utility. Clash of mismatch culture may rose, employees will have to adapt to change, the customer will be impacted emotionally but at the end of the day, is considered as a wisdom to consolidate the PSBs.

After the 2008 crisis, a report by IMF stated that big banks are a systematic risk to the economy, small banks serve better to the economy, big banks have riskier behaviour and weaken the national sovereignty and therefore government should anchor on a variety of quality banks — some big, some small, some local etc.

Some PSBs are becoming irrelevant and losing market share. They have come under the banner of PCA (prompt corrective action) framework. IMF suggested that privatisation of weak PSBs has an edge over merging. Merging will erode the strength of the system. Increased investor’s confidence due to GST (goods and service tax) and IBC (insolvency and bankruptcy code) will help in disinvestment. Private banks have a good track record of mergers against their state-owned counterparts.

Many PSBs come into play to cater to the diverse fields which didn’t garner attention from private lenders focussed on big businesses. One of their purposes was implementing government policies which the government couldn’t do as it lacked funds. But PSBs too have approached the private banks on this factor. Reconstruction and reinvestment by funds from the government will lead to continuous losses and will prove to be a bad experiment. Instead, the government should move their focus on co-operative banks and small financial institutions. They would serve the purpose in a more cohesive way. This will develop community-level banking. Also, this would help implement the three-tier system and variety in banks.

Concluding the above, there is a need to address the issue as increasing NPAs will lead to lower credit growth and the trust in investors and account holders. Radical restructuring needs to be implemented in the form of either mergers or disinvestment. Some hurdles would intervene but only at the start. Wisdom is in observing ground realities and taking decisions accordingly.

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