In wake of the government’s effort to revive the banks from the NPA issue they expressed its desire to merge 10 Public sector banks (PSB) into 4. This move will bring the total no. of banks from 27 to 12.

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  • Creation of some big sized banks will enhance their credit giving capacity.
  • Make them global ready and help them in getting economies of scale further leading to a strong national presence and global reach of these banks.
  • Earlier the government has already merged SBI & its associates, Vijaya Bank, Dena Bank & Bank of Baroda which proved out to be a success and it helped these debt trapped banks to rationalise their capital.
  • Followed by INR 55,000 CR. recapitalisation plan for the merged entity.

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Q. How does this 3 tier system being introduced in banking structure?

  • 1st tier: 3-4 big sized banks
  • 2nd tier: Regional centric banks
  • 3rd tier: Mid-sized lenders/FI

Q. What are the different aspects of this plan?

  • Creating economies of scale
  • Expand & Develop the industries
  • Aspirations to meet $5 trillion economy

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Q. Do they have sufficient heft (invest in tech, customer service, SWOT analysis)?

NO, if we talk specifically about PSB they don’t consider investing in better customer service or in technology, this is the reason they lack are running behind their competitors in the market specifically Private sector banks.     

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Q. How did the government arrived at this decision of merging these banks not some other bank?

There are certain key areas which are kept in mind before finalising these mergers.

  • Customer disruption should be minimal
  • Credit activity should not get disturbed
  • Core banking software
  • Level of NPA’s
  • Geographical Presence
  • CASA Deposits
  • Competition

Q. How will this merger improve the performance matrix of these banks?

Any merger has to happen along with other components in it.

  • Product Innovation
  • Capitalisation
  • Continuous Reform
  • Individual bank analysis
  • Management structure (CEO selection)
  • Investment in Technology
  • Better Backend Process

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Q. How will this merger impact the Indian Economy?

  • For any economy to grow credit (equity) capacity and capital (debt) both matters. When you want to start a new project you will have to visit many FI, VC to get financing for your project.

For example:  SBI recently come up with a new application “YONO” which helps its customers to carry out a card less transactions at ATM. Had it been a small bank with less capital it would not be possible for SBI to take such decision.

  • Globalised approach: Merged entity will be big in size and it will bring ease of expanding their business abroad.

For example:  some of them would like to target European market, African market etc. what kind of products they are going to offer depending on the local factors there.

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