With an aim to strengthen the banking system of the country and after a plan to pump Rs. 2.11 lakh crores in the banking system, the finance ministry is now planning an interesting move to merge Public Sector Banks.
The 21 PSBs in India hold more than 74 % of the total cash deposits of the country and also a large chunk of the NPAs amounting to Rs. 7.33 Trillion.
The current banking activity is not adequate for India to meet its growth objectives for the long run. The same would require greater financial inclusion and expansion of credit facilities to MSME sector for which banking system needs to be redesigned extensively. This would further require solving the problems of growing NPAs. The Finance Ministry has opined that merging public sector banks would create few strong and competent banks which would be ‘To Big To Fall’, in contrast to having a large number of ill-performing banks which fail at achieving the aims of the Government.
Recently the Finance Ministry has been hinting at a three-dimensional approach for revamping the Banking Sector i.e. improving the loan recovery process, Re-capitalisation and consolidation of banks.
How will it be done?
In August 2017, the Cabinet gave an in-principle approval for merger of public sector banks. Recently the Government has formulated an “Alternative Mechanism” for its aim of consolidation of Public Sector Banks. The Mechanism will involve examining proposals from banks to initiate schemes for merger. The scheme for merger will finally be approved by the central government and placed before the Parliament. The cabinet has also hinted that an ill-performing bank would not be merged with a good performer to avoid dilution of objectives of the Mechanism.
The Principal Economic Advisor to the Finance Ministry has opined that the number of PSBs shall be brought down from 21 to the range of 10-15. The move might also induce a sense of healthy competition among the resulting few entities.
In Indian context, mergers had always been seen as bail out tool and they often end up being a nightmare for the shareholders.
RBI governor Urjit Patel recently said in a speech that Ill-performing PSBs with bad loans are leading to loss in their market share which might be irretrievable.
However, the real effect of the consolidation is subjective and yet to be seen with time.