Merger of banks has been in the public discourse for quite some time now due to the fact that the sector is struggling to grow in the present scenario. The capital base is fast depleting, the NPA accounts are rising with unprecedented growth and the human resources of banks are also facing crunch due to attrition and massive retirements in the last few years.

It is not possible for the government to keep on infusing capital in the public sector banks when there are so many whereas according to Basel-III norms, banks have to arrange for more capital to comply with the Capital Adequacy Ratio.

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Then what can be done?

One way to take care of this issue is privatization of the public sector banks. But, the response to this has been more than dismal as has been observed when the government put the IDBI Bank on the block for majority share disinvestment. The government could save face by bringing in LIC to buy the majority stake in IDBI Bank when no other investor showed interest. It is not difficult to understand the reason behind it. The banking sector is going through a very rough phase with little chance of revival seen in the near future. Then why will anybody invest in this sector? After all, who wants to board a sinking ship with full knowledge that it is destined to sink?

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It is not difficult to understand the reason behind it. The banking sector is going through a very rough phase with little chance of revival seen in the near future. Then why will anybody invest in this sector? After all, who wants to board a sinking ship with full knowledge that it is destined to sink?

Here comes the relevance of merger as a possible solution to the issue in hand. The merger of Indian banks was first recommended by the Narsimhan Committee-II in its recommendations in 1998. This committee was of the view that there are so many Indian banks but hardly any Indian bank is counted as an international entity. That is why, it proposed of a three-tier banking system – establishment of three large banks with international presence, 8-10 national level banks and a large number of regional and rural banks.

In the next two decades, this idea has been discussed in detail by the public as well as the policymakers. However, no decision has been reached to implement this in India in large scale except the SBI experiment in 2017.
This committee was of the view that there are so many Indian banks but hardly any Indian bank is counted as an international entity. That is why, it proposed of a three-tier banking system – establishment of three large banks with international presence, 8-10 national level banks and a large number of regional and rural banks.

In the next two decades, this idea has been discussed in detail by the public as well as the policymakers. However, no decision has been reached to implement this in India in large scale except the SBI experiment in 2017.

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The present scenario of banking in India

At present, there are 21 nationalized banks in India including IDBI Bank whereas 21 private banks are there in India. Apart from these, there are 56 Regional Rural Banks and also foreign banks in India. The Reserve Bank has also given approval to Payments Banks and Small Finance Banks to operate in the country so that the financial inclusion objective can be achieved by the Government. There are also cooperative banks operating in the country.

This clearly shows that the Indian banking sector is already crowded with a number of different types of banks operating in the country.
The Reserve Bank has also given approval to Payments Banks and Small Finance Banks to operate in the country so that the financial inclusion objective can be achieved by the Government. There are also cooperative banks operating in the country.

This clearly shows that the Indian banking sector is already crowded with a number of different types of banks operating in the country.

Why is Merger recommended in India?

Given the crowded banking sector in the country, it is not very difficult to understand why merger is being recommended time and again by the various banking committees and also the government. Why is it so? Let’s list the reasons:

  • Banks are struggling to survive in the present times with so many issues facing the sector. Merger of weak banks with the stronger banks will help in improving the situation to a great extent

  • With quality asset base in the stronger bank, the gross NPA will also come down as a percentage of the total asset base of the merged entity

  • With Basel III guidelines coming into force in 2019, it is very important that all the banks comply with the capital requirements. It is not possible for the government to take this responsibility alone, so, merger of banks will assist in taking care of the required capital according to the new regulations

  • The human resource crunch will end since many staff will be redundant in the merged entity thereby reducing the burden of costs on the bank

  • There will be rationalization of branches of the merged banks across the country. This will help in reining in the operational costs of the banks

  • With merger, there will be large banks in the country that can compete with the international financial organizations. For example, post-merger, SBI is now one of the top 50 banks in the country in terms of capital base. It is also easier to manage the liquidity issues for a larger bank

So, there are so many positive sides of merger of banks in the country. So, why is it not happening in the country? Because there is always the other side of the coin which needs to be studied as well.

  • If there is a large bank instead of many small ones, a systemic failure will affect almost the whole economy. We have already seen it in case of the global financial crisis in 2008 when many big banks had failed in the USA costing the economy dear

  • With large banks, they will lose their regional focus and it may affect the financial inclusion drive of the government in the long run

  • With small banks, it is easy to recapitalize them or the NPAs can still be managed but with a large bank such as SBI, it will be more difficult for the government to recapitalize them and if they keep on incurring big scale losses, the whole sector may collapse

  • In case of large banks, human resource issues will also need to be tackled since there may be stagnation in the senior management post-merger as the merger will make many posts redundant in the higher grade

  • If the government merges loss-making banks with the stronger banks, the strong bank may also face issues regarding the quality of asset base and also the management of demand deposits in such banks. That will further worsen the whole situation

  • There will be large-scale logistics issues once the merger takes place. It may affect the customer service of the newly merged entities and in the process the banks may lose customers as well

Merger of banks is not going to solve the whole situation since the problem is not in the size of the banks but it is the in the operational structure of such banks. Certainly merger of small banks with the larger ones will not magically heal everything. Other issues will also need to be sorted so that there is a complete solution to the issues being faced by this sector.

Certainly merger of small banks with the larger ones will not magically heal everything. Other issues will also need to be sorted so that there is a complete solution to the issues being faced by this sector.

Merger of banks: What is the way forward?

The government has started the process by merger of the associate banks of the SBI with the State Bank of India in 2017. There are other proposals as well to merge some banks with certain other banks. The government has resumed discussions to this effect recently but the Finance Ministry is of the view that any such proposal of merger should come from the respective boards of the banks.

Given that the general elections are approaching in 2019, it is unlikely that the government will move ahead for a mega merger of banks.

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Hence, the timeline of any merger of banks is certainly uncertain but it is going to happen at some point of time in future for sure.
There are other proposals as well to merge some banks with certain other banks. The government has resumed discussions to this effect recently but the Finance Ministry is of the view that any such proposal of merger should come from the respective boards of the banks.

Given that the general elections are approaching in 2019, it is unlikely that the government will move ahead for a mega merger of banks.

Hence, the timeline of any merger of banks is certainly uncertain but it is going to happen at some point of time in future for sure.

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