Merger of Public Sector Banks, A Possible Solution for Rising Non Performing Assets

This article talks about the most recent declaration by finance ministry of Government of India about consolidation of Public Sector Banks (PSBs). It discusses the reasons behind this decision of merger of Public Sector Banks (PSBs) especially to deal with the problem of rising NPA (Non Performing Assets). It mentions which banks are to be consolidated and also details what steps are taken by government for smooth consolidation.

Introduction

Which Public Sector Banks are to be consolidated?

Idea behind Consolidation of Public Sector Banks

Steps taken by Government

What are the Concerns?

Conclusion

Introduction

Finance Ministry of Government of India decides to consolidate ten public sector banks (PSBs) in to four PSBs. This will result in reduction of number of PSBs from 27 to 12 only. The cause behind this decision is attributed to the critical situation of government banks due to high Non Performing Assets (NPA). Thus, in order to ameliorate the worsening conditions of public sector banks, this step is going to be taken.     

Which Public Sector Banks are to be consolidated?

The ten public sector banks are going to be merged in to four banks. These banks are selected on the basis of technological similarity. It means banks which follow the same type of software and technology are selected to be consolidated so as to prevent any incompatibility. Similarly, compatibility in core banking is another ground for choosing banks for merger.

The anchor banks* are Punjab National Bank, Canara Bank, Union Bank, Indian Bank. The four consolidations or mergers are as following:

1. Punjab National Bank (PNB) + Oriental Bank of Commerce (OBC) + United Bank of India
2. Canara Bank + Syndicate Bank
3. Union Bank + Andhra Bank + Corporation Bank
4. Indian Bank + Allahabad Bank

*Anchor Banks are leading banks or those banks in which other banks have to be merged.

Idea behind Consolidation of Public Sector Banks

The idea is not new. One such step for consolidation of five public sector banks in to State Bank of India has already been taken in 2017 and two banks in to Bank of Baroda in this year (2019) also. The latest merger is also on same line with the purpose of harnessing the economies of scale. Since merger of banks will result in requirement of fewer branches, less ATMs and less cost of lending, therefore it is significant for harnessing the economies of scale. It will also enhance the operational efficiency of banks and their credit capacity also. The merger may have a significant role in compensating loss due to NPA (Non Performing Assets). This may result in strong national presence of the consolidated banks. It is also expected that the merger of banks may result in meeting the global standards.

Steps taken by Government

In order to smooth the process of consolidation of public sector banks, government has decided to take following steps:

1. Membership of board committee of banks is to be rationalized.
2. Accountability is to be brought on the board committee to assess the performance.
3. A “Chief Risk Officer” is to be appointed from market at market linked salaries so as to attract the best talent. The task of this officer will be to advise the banks about risk taking.
4. Infusion of Rs 55,250 Cr in ten Public Sector Banks (they are not those PSBs which are consolidated).
5. A succession plan is to be built for replacement of managers. It will focus on individual development so that newly joined can take the role and responsibilities of their predecessors.
6. Another step is to provide a residual service which mans tenure of experienced and innovative employees can be increased by two years.
7. Engagement with non official directors is to be increased. Such directors who have more than 20 years of experience in banking, can give due deliberations and add value to the organization.

What are the concerns?

This merger has some concerns:

1. The appointments may be political which can compromise the merit.
2. There is a fear of job loss. But the government has assured that the jobs of preexisting employees will not be impacted which was even witnessed in last merger in Bank of Baroda.
3. This merger can face more friction than last one because the merging banks are large; they have their own values and modus operandi.
4. Punjab National Bank, which is going o become 2^nd largest public sector bank after merger next to State Bank of India, is itself fraught with problems.

Conclusion

Overall, the amalgamation of public sector banks is expected to harness the economies of scale and by reducing NPA (Non Performing Assets), it can give a boost to banking system which is the backbone of Indian economy. What is desired is the smooth consolidation without giving any shock to the financial system.

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