Needless to say that the primary and most visible motive of the merger plan is to increase the efficiency and reduce the risks of NPAs, which has become the most heated topic in the banking industry.
In a time when major developments are on halt, the banking sector in India is witnessing silent developments, which holds much of its growth prospects in the post-Covid economy- through the merger of several public sector banks (PSBs). This step comes at an important time when a slew of structural reforms are already underway. Though, announced in the last year, when it was seen by most of the people as merely a simplification move; the changed times, due to this pandemic has made this move a much consequential one. When the government went with the idea of merger, it sent ripples across the nation, not only to the big players of industry but nearly every stakeholder including the commoners. Some saw this as a step which sounds good but shady in its implementation. Undoubtedly, in a country where structural issues plague the economy, this maneuver is bold as well as unprecedented when one takes into account the scale on which it is being done.
Banking industry, in the past, has faced many challenges within and outside the industry due to prevalent policies, global trends and lack of a robust legal framework since independence. The dominance of PSBs in India is itself a standing proof that such a move leaves a direct effect on the masses. Therefore, the big question before the government and the RBI is that will this move yield expected results or it’s another superficial and wasteful experiment? For getting answers to questions like these, several factors like the history of bank mergers, prevalent best practices and current economic condition of the country needs to be considered.
The debate of bank mergers isn’t a new one. It was firstly contemplated by the Narasimham Committee reports in 1991 and again in 1998. The committee was of the view that stressed on the need of consolidating the banks so that some big banks can be groomed and some small to serve the regional needs. Thereafter, the Raghuram Rajan committee on financial reforms also highlighted this issue and suggested the need for a reform in the banking order. In recent years, it was the P.J Nayak committee, which recommended that the banks ought to be freed from government control and run by the bank board bureau. The lack of efficiency and skills of market operations in PSBs with respect to their private counterparts was another issue observed by this committee.
Needless to say that the primary and most visible motive of the plan is to increase the efficiency and reduce the risks of NPAs, which has become the most heated topic in the banking industry. It is to be borne in mind that in recent years, growing demand for privatization in different industries has forced the state machinery to find new solutions- to retain their share of the market. The PSBs aren’t an exception to this trend who lag behind private banks because of various reasons, a few noted above in the report of committees. Therefore, the proposed cluster of state owned banks with big regional as well as capital base isn’t a bad idea per se as it would enable them to compete with an adequate resource pool in hand.
Different banks in India have different regional centres of operations with focused activities in those areas only. Hence, after the merger, they will enjoy a sizable presence everywhere across the country. Another common issue with public sector companies is that they are reluctant to new changes and therefore face the loss of consumer base. In the economic package for self-reliant India, disbursement of loans were a main feature, so it can be seen as an apt move in this backdrop. This decision can also be termed as a master step towards the objective of financial inclusion as all the PSBs ultimately push their efforts in this direction. Since it came into power, the idea of financial inclusion was prioritised by the government with the launch of Jan Dhan Yojna. This merger will only serve that purpose in a more convergent and unified way. As it has been pointed out, the main issue at the forefront is the NPAs, causing the twin balance sheet problem in the last few years. To check this, one of the ideas suggested by the economists is the strategic capital infusion- strengthening these banks for a competition with private players who have much less rate of NPAs.
As it is evident from the past reforms, rolling the ball in the core sectors like banking has more chances of a possible downfall. The report of the Narsimhan committee on whose recommendations consolidation has been made has lost its relevance and seems to be too old to incorporate now. The rationale behind the merger is to create some big banks which can compete in the international market along with American and European ones, but surprisingly there are no Indian banks which are in even top 50 globally. In addition to this, with the continuous increase in NPAs in the financial statements, the merger of stressed banks with a comparatively healthy one will only enhance the load on the latter one. Among the banks being merged, a few are in a much stable state, but then there are some whose conditions raise serious questions about their viability itself.
The integration of banking activities is not as easy on the ground as it seems to be on paper. It has faced backlash from the bankers association and unions who are habituated of having deep ties with the parent bank. It is because the concern of employees related to the cultural fit as there are some banks whose area of operations are centred in a specific region and on the other hand they are being merged with one with different regional bases. The implementation of this merger is being done in the time of lockdown which is certainly a case of relief for people. It would not be out of place to suggest that the techniques or models adopted for integration should be looked at with deliberate care.
The concerns with this merger aren’t only people oriented but it also causes a serious headache for the regulators and watchdogs of financial markets. It will further raise the difficulty level of RBI to monitor these merged banks that would have big sized operations and there would be a dire need for new mechanisms for catching the banking frauds which has become rampant in the last few years. There is a need for a new regulatory framework for watching and controlling the operations. In addition to this, after the shock felt due to Corona, lending would require a smooth and a swift process which won’t be easy as different banks have their own policies for that.
There would hardly be any doubt if one claims that the banking system of India is facing fresh trouble from some time which is the result of poor management by previous regimes. In the time when the trends of the global economy are sending worrisome signals from various corners, it’s the time for a robust national policy concerning the economy. The government at the centre, by taking such strong decisions has sent the message that it will move towards a revamp of the economy. The sluggish banking system is among the initial sectors undergoing through overhaul but there are others which need a look if the growth has to be continuous and sustainable. The good thing is that the government has initiated such measures and now is the time for us as citizens to stand by the reforms.
The author is a LLB student, National Law University, Lucknow and is an intern at Academics4nation