It is no secret that private banks are assumed to score higher on the grounds of effectiveness and efficiencies compared to the public sector banks (PSBs). In addition, most PSBs depend on government’s aid to live on, which adds to its burden. Keeping this in mind, the PJ Nayak panel, in 2014, had recommended to privatise PSBs to lighten the government’s burden.
However, the government has chosen an alternative route to redefine the banking sector of India. This only goes on to show that the assumption made by the masses is true to quite an extent. Why else would the government merge PSBs? The idea of merging certain public sector banks (PSB) was first conceived by the RBI in 2018. This move, said the apex bank, would help revamp India’s banking system and create global banking majors, strong and well-funded, if successful.
Later in August 2019, PM Narendra Modi announced a mega-merger of 10 state-run banks (PSB) into 4. Recently, Finance Minister Nirmala Sitharaman conveyed the cabinet’s approval of the same. She also said that the merger would take place after the boards of the banks meet and decide how to take things further. As such, even as COVID-19 continues to impact the economy adversely, RBI, in a press release dated 28th Mar 2020, maintained that the mergers will take effect from 1st April 2020.
With this background, let us look at the key points you should know as a customer or even a mere stakeholder of the banking system.
Which banks will be amalgamated?
The centre has identified 10 state-run banks that will be amalgamated with the respective anchor banks. Now, anchor banks are state-run banks that will drive the amalgamation process. Take a look at the PSBs that are selected to be merged along with their anchor banks:
|Anchor banks||PSBs to be merged|
|PNB||Oriental Bank of Commerce and United Bank|
|Indian Bank||Allahabad Bank|
|Canara Bank||Syndicate Bank|
|Union Bank of India||Corporation Bank and Andhra Bank|
Notably, post the merger:
- The Punjab National Bank, United Bank, and Oriental Bank of Commerce would be worth Rs 7.95 tn, making it India’s 2nd largest bank
- At Rs 15.2 tn, Syndicate Bank and Canara Bank would become the 4th largest bank in India
- Andhra Bank and Corporation Bank merged with Union Bank of India would be worth Rs 14.59 tn, making it the 5th largest PSB
- Allahabad Bank with Indian Bank would be the 7th largest PSB at Rs 8.08 tn
In addition to merging PSBs, the finance minister has also announced certain governance reforms, which would aid in making the merger a success. One such reform aims at managing risk in state-run banks by appointing specialised chief risk officers with market-linked compensation. This would help the banks to manage and address the associated risks and dodge them, should they have a plan in advance.
What benefits would the merger bring?
The mega-merger of these 10 PSBs is expected to address a range of issues as follows:
- It would combine and strengthen the balance sheets of the merging and thus help nullify the NPAs of the smaller PSBs
- It would allow the merged entity to tap into the benefits of regional focus that these smaller PSBs have
- Combined, a high capital would allow anchor banks to offer higher loan amounts. The ceiling for offering loans to individual borrowers would then increase to Rs 3,000 cr
- It would reduce the amount of recapitalization that the government would have to pump into the weaker PSBs
- Customers would have access to other financial products in addition to those offered by the existing PSBs
- The merger would make way for technology upgradation and optimise costs across branches
What challenges would the merger entail?
While the merger would be beneficial to the banking sector as a whole, it would also give birth to certain issues as follows:
- The merger would roll small issues of the identified PSBs into a bigger one
- The merger would demand a relatively higher capital infusion from the government to support the PSBs
- Governance-related issues may crop up with banks such as PNB taking charge of two weaker banks
- The integration process would take hit as experienced heads/chiefs as some of the PSBs to be merged would finish their term this year
- The employee unions of some of these PSBs are unhappy with the merger, which would result in a strike
- Amid the impact of COVID-19, the merger would affect the banks’ lending activities that are necessary to push production and revive the economy
How will the merger impact the customers?
While the merger may bring up challenges at the macro level, you would be more interested in understanding things at a micro-level. Here’s how the move would impact you as the customer of one of these banks:
- Existing loans will be transferred to the merged bank and borrowers will continue paying the same EMIs as before the merger
- You would enjoy interoperability of services and can avail them at any of the branches
- Rate of interest on investments such as fixed deposits and credit such as loans would remain unchanged as these products as contracts, whose terms prevail
- You would require to take note of the changes that the merger would bring. These include a change in your account number, customer IDs, IFSC codes, standing or automated instructions for payments of bills, SIPs, and EMIs
- The terms of validity of your existing cheque book may change. Moreover, over time, your cheque book will be replaced with that of the anchor bank
- You would have to exchange the debit and credit cards issued by a merging bank with that of the merged entity
- In case you hold accounts with more than one PSB, you may be allotted a single customer ID
- You would have to ensure that your mobile number and email ID is updated correctly with the banks
- In a bid to rationalize branches, banks may shut some of their existing branches
However, most of these changes may only come into effect after 18-24 months of the amalgamation when the banks integrate their IT systems.
To conclude, while the amalgamation of the identified PSBs would strengthen the banking system as a whole, create stronger individual PSBs, and lighten [MOU7] the government’s burden of funding, the effectiveness of the merger will solely depend on how well it will be implemented.