Indian Economy

Bank Mergers: Need and Implications

Recently it has been seen a lot of time in the news, merger of banks i.e, SBI and its Associates, Dena Bank, Vijaya Bank etc. However, is this a sensible step towards our growing economy.

 

NEED:

  • We have most of our banks overburdened with the weight of NPAs.
  • Some banks are already on the verge of finishing/going bankrupt.
  • To make certain number of manageable big banks instead of small failing ones.
  • Merger will lead to larger balance sheet to take care of risks too. The burden on the central government to recapitalize the public sector banks again and again will come down substantially too.
  • This may enable banks to maintain optimum Capital Adequacy Ratio.
  • Mergers help many PSBs, which are geographically concentrated, to expand their coverage beyond their outreach.
  • Workers lack skills and training, most importantly the quality at middle level management is low. The consolidation may improve the professional standards.
  • It will reduce unnecessary interference by board members in day to day affairs of the banks.

 

IMPLICATIONS:

  • Merger is a long process involving Government, RBI, SEBI and a lot of other agencies.
  • We don’t have enough background on risk management. The weaknesses of the small banks may get transferred to the bigger bank also.
  • There are chances that merging these banks will increase the stressed assets of the banks.
  • This NPA problem may troublesome whole BASEL NORMS.
  • Disagreement between owners and government will delay the merger even more.
  • Merger will affect regional flavour and end regional focus.

 

WAY FORWARD:

  • The government shall not have any hidden political agenda, in bank mergers. The government shall not rush through the process of bank mergers.
  • All stakeholders are taken into confidence, before the merger exercise is started.
  • Risk and Challenges needs to be taken in consideration before the merger.
  • Mission Indradhanush, Bankruptcy and Solvency code will help tackling the NPA and stressed assets problem.
  • 3Cs may be of the biggest help. (CVC, CAG, CBI)
  • The Financial Risk Management and relevant training for the staff is the need of the hour.

 

Merger is a good idea. However, this should be carried out with right banks for the right reasons. Since mergers are also about people, a huge amount of planning would be required to make the consolidation process smoother with holistic approach. A lasting solution is required with an integrated approach from all stakeholders including the government.

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