Basics of PSU bank mergers

In another round of boosters for the economy, Finance Minister Niramala Sitharaman announced the amalgamation of 10 public sector banks into four big banks a few days back. After this, the total number of Public Sector Banks in the country will come down to 12 from 27 banks. An INR 55,250 crore upfront capital for credit growth & regulatory compliance to support the economy was also announced. The government calls it as ‘unlocking potential through consolidation’. 

The government has listed three broad gains from the consolidation. The first benefit will not only result in an enhanced capacity to increase credit or lend but also help in capacity building, especially in project appraisal, risk management and monitoring. The second gain the Government claims is strong national presence and global reach as competition from private banking institutions is eating into the share of PSBs, thanks to better digitisation, faster processing of loans, and much better customer service. The third potential gain is the operational efficiency gains that reduce the cost of lending as banking products and offerings have changed significantly in the last decade.

What is worrying is that these merger announcements don’t address the core structural and fundamental issues plaguing the PSBs. No retrenchment has taken place post-merger of Bank of Baroda, Dena Bank and Vijaya Bank; staff has been redeployed and best practices in each bank have been replicated in others. This action is likely to impact economies of scale and efficiency of operations over the medium-long term positively.