Banking on size, technology, and efficiency

Finance Minister Nirmala Sitharaman announced the merger of 10 public sector banks into four large lenders on Friday, bringing down the total number of government-owned banks to 12, from 27 in 2017. The FM also announced ₹55,250 crore upfront capital infusion into these banks to push forward the government’s growth agenda and help create a $5 trillion economy in the next five years.

“12 solidly present, well-consolidated, energised, adequately capital-endowed banks will now operate to target $5 trillion economy and give the necessary support for banking facilities required by our customers,” Sitharaman said at a press conference.

The first of these big moves include the amalgamation of the Punjab National Bank (PNB), Oriental Bank of Commerce, and United Bank of India, to create the second-largest PSB in the country with a business of ₹17.95 trillion, which is at least 1.5 times bigger than PNB. Incidentally, the State Bank of India, which also saw the merger of five associate banks and the Mahila Bank in 2017 continues to be the country’s largest lender.

Sitharaman also announced the merger of Canara and Syndicate Bank—both south India-based banks—to become the fourth largest PSB with ₹15.2 lakh crore business and third largest branch network in India. The Union Bank of India, the Andhra Bank and the Corporation Bank too were merged to create India's fifth largest PSB with ₹14.6 lakh crore business and fourth largest branch network. Similarly, the Indian Bank will be merged with Allahabad Bank to make India’s seventh-largest PSB with a business worth ₹8.08 trillion.

Sitharaman added that four banks—Indian Overseas Bank (in south), UCO Bank (in east), Bank of Maharashtra (in east) and Punjab and Sind Bank (in north, particularly in Punjab)—will continue to have a strong regional presence. The idea is to retain the identity of the banks.

A push for consolidation of state-run banks, which the government believes will not only lead to economies of scale, but also make lenders stronger, more competitive and improve their risk-taking appetite. Bigger, fewer and healthier banks will be in a better position to finance new projects, serve customers better and require less capitalisation, which means less burden on the taxpayer.

However, Sitharaman said that the proposed mergers will not cause any disruption similar to what had happened in the case of Bank of Baroda’s merger with Vijaya Bank and Dena Bank. The reason: the mergers of these banks were made keeping in mind the technology platforms of these banks; merged banks were using the same platforms for their core banking operations.

For instance, while Canara and Syndicate Banks were on the iFlex core banking system, Indian and Allahabad banks used BaNCS, promoted by the Finance Ministry. All this meant that customers will have a seamless experience while conducting banking operations with any of the banks. “We made sure that the technology, which is used in the banks, is compatible and all banks can enable quick realisations of gains, without any disruption in service," she added.

She also kept her promise, made a week earlier about front-loading its ₹70,000 crore capital infusion into PSBs to nudge an additional lending of ₹5 trillion. An amount of ₹55,250 crore was announced as upfront capital for credit growth and regulatory compliance (like meeting the Basel II norms) to support the slowing economy, which reported just a 5% growth in the April to June quarter of FY 19.

So to push growth PNB will get ₹16,000 crore; Union Bank ₹11,700 crore; Canara Bank ₹6,500 crore; Indian Overseas Bank ₹3,800 crore; Central Bank of India ₹3,300 crore; Bank of Baroda ₹7,000 crore; Indian Bank ₹2,500 crore and Uco Bank ₹2,100 crore. Interestingly enough, in FY 19, the National Democratic Alliance had infused over ₹1 trillion in PSBs. The last tranche of ₹48,239 crore in February allowed six lenders to exit the Reserve Bank of India’s prompt corrective action (PCA) scheme. RBI uses the PCA framework to ring-fence lenders breaching regulatory threshold.

“Bank consolidation is a good move from government in step towards improving efficiency of the PSBs. Specifically the measures announced to improve corporate governance and grooming leadership, if followed through with right intent, resources and commitment, can go a long way in addressing the challenges that PSBs has been facing historically,” says Prakash Agarwal, head, financial institution, India Ratings and Research.

The minister, however, did not mention any timeline for the realisation of the mergers. Finance secretary Rajiv Kumar said the decision will be taken by the banks’ boards in the near future. The respective boards would come back to the finance ministry, which will consult the banking regulator. After the consultation, the scheme of amalgamation will be made and then a date will be decided in consultation with banks as per their wishes, he said.

The finance minister’s decision to go ahead with the consolidation of the banking sector was bolstered with the success of the Bank of Baroda’s merger with Vijaya Bank and Dena Bank as well as the healthy position of the state-run banks. For instance, the gross non-performing assets of PSBs declined to ₹7.9 trillion in the March quarter of the previous fiscal from ₹8.65 trillion in the preceding quarter. Out of 18 PSBs, 14 are making profits.

However, consolidation comes with its own set of challenges. Rationalisation of branches is an issue as many of these banks may have branches in the same area. Rationalisation of the top brass is another challenge as there cannot be two chairmen of a single bank. Also, cultural integration can be a major issue despite all of them being public sector banks.