Finance Minister Nirmala Sitharaman on 4 March 2020 said the exercise of consolidation of 10 public sector banks (PSBs) into four is on course and the merger will come into effect from April 1, 2020. The Union Cabinet, she said, has given a go-ahead for the merger proposal and the government has been in regular touch with these banks. There will be no regulatory issues. The banks' merger is on course and decisions have already been taken by the respective bank boards, she said. The mergers are aimed at creating global sized banks in India.

 

What

  1. In the biggest consolidation exercise in the banking space, the government in August 2019 had announced four major mergers of public sector banks, bringing down their total number to 12 from 27 in 2017, a move aimed at making state-owned lenders global sized banks.
  2. United Bank of India and Oriental Bank of Commerce will be merged with Punjab National Bank; Syndicate Bank will be merged with Canara Bank; Allahabad Bank will be amalgamated with Indian Bank; and Andhra Bank and Corporation Bank will be consolidated with Union Bank of India.
  3. Last year, Dena Bank and Vijaya Bank were merged with Bank of Baroda. Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the State Bank of India.

How does consolidation help?

  1. For years, expert committees starting from the M Narasimham Committee have recommended that India should have fewer but bigger and better-managed banks to ensure optimal use of capital, efficiency of operations, wider reach and greater profitability.
  2. The logic is that rather than having several of its own banks competing for the same pie (in terms of deposits or loans) in the same narrow geographies, leading to each one incurring costs, it would make sense to have large-sized banks.
  3. This may be true especially in India’s bigger cities and towns. It has also been argued that such an entity will then be able to respond better to emerging market trends or shifts and compete more with private banks.
  4. The Finance Minister has said that the proposed big banks would be able to compete globally and improve their operational efficiency once they lower their cost of lending and improve lending.
  5. But none of India’s banks including the largest, SBI, figures in the list of the top 50 global banks. So that may be a long way away.