Economy Revival: (Bank Merger)

Published on 06-Sept-2019

Is Bank merger good or bad?

Approx Read Time: 4 minutes


  • While the deposits were coming in, these were not really being put to work. Most of the PSBs were left doing little other than the mandatory priority sector lending, and today, are slowly becoming irrelevant in the loan market.
  • Banks have been ceding share to their private-sector competitors, both in the loans and deposits markets.
  • Despite their large branch networks, and strong deposit and customer base, PSU banks have also been losing out to NBFCs (Non-Banking Financial Company).
  • That, together with their NPA woes, has left their revenues subdued; since the managements have no leeway to cut employee expenses or other costs, the profits have suffered.

Recent Bank Merger:

  • In a major reform measure, the Union Finance Ministry has announced the merger of 10 public sector banks (PSBs) into four entities.
  • While some experts are calling to completely shut down some of the weaker public sector banks, it will be politically infeasible.
  • Laying off tens of thousands of employees will not be seen as an option, and difficult for any government to do it.
  • In such a scenario, consolidation to down the number of PSU banks is a good politically feasible idea.
  • More mergers could happen:
    • In fact, the remaining ones too should be amalgamated soon.

Effect (Bank Merger):

  • The merger process is not going to result in any cost synergies because there is going to be no immediate reduction in employees.
  • However, the natural attrition should, over time, bring down the workforce and expenses.
    • Bad – Could divert the focus of bankers away from credit growth,
  • Also, while the government must be applauded for initiating the amalgamation of ten banks into four entities, the timing is not perfect.
  • The operational hassles of mergers could leave managements preoccupied at a time when they need to be focused on lending to help the economy get back on its feet.


  • While it is important to reduce the workforce, the tougher task is to change the work culture.
  • That is easier said than done because years of incompetence, inefficiency and even insincerity cannot be undone in a short time.
  • To be able to bring about a meaningful change to the work ethics, it is also important to have a top management team that comprises some new people with fresh ideas.
  • In today’s time, banking is seeing a paradigm shift, and banks are changing into FinTech companies.
  • In such a scenario, without a complete overhaul of the mindset and the systems, it will become increasingly harder for public sector banks to compete.
    • Banks need the right to hire and fire:
      1. The biggest roadblock has been the bank unions who ask for annual raises of 10-15%, with no commensurate improvements in productivity.
      2. These employee unions, unfortunately, enjoy immense clout, and unless banks have the right to hire and fire like their private-sector peers do, their business models can’t be viable.
  • Adoption of latest technologies:
    • Expenses on technology are going to increase and banks need to hire talent in areas such as blockchain, AI, IoT, and cyber-security.
  • The capital injected by the government must be used to lend to the right set of customers.
    • Protection from the 4Cs for honest bankers:
      1. The government has talked of making life easier for state-run banks by giving their board and senior management, additional powers.
      2. But, bankers are apprehensive of taking decisions and may not be convinced by the government’s efforts to protect them from the 4Cs—CAG, CBI, CVC, and the courts.

 Way Forward:

  • The banking system today has surplus liquidity, but loan growth is slowing.
  • So, the Rs 55,000 crore that the government proposes to infuse into these lenders may not be put to work just yet.
  • This is unfortunate because the ten banks account for 23% of the total credit in the system.
  • Nonetheless, it is a good start and the government must not give in to pressure from the banking unions and the process mustn’t stall.
  • It will not be easy, but there is, really no room now for soft options.

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