PSU Banks Merger List : An Overview of Major Banking Reform

The merger did rounds of the approved framework by the Union Cabinet for merging state-owned banks. The consolidation of a total of 21 public sector banks with the other bank have to be done in order to phase out the bad loan problems. The merger will be able to bring the plethora of public sector banks from 21 to somewhere between 15.

 

Framework for Consolidation of Public Sector Banks

• Cabinet accepts the framework for consolidating public sector banks.
• Formulation of Alternative Mechanism(AM) to provide in-principle approval to bank proposals in order to prepare amalgamation schemes.
• After in-principle acceptance, the banks will take steps with respect to laws and SEBI's norms
• The final scheme will be disclosed by Central Government in consultation with Reserve Bank of India(RBI).
• Focus on creating strong and competitive banks in public sector spectrum in order to fulfill the credit requirements of a growing economy, absorb shocks and have the capability for raising resources without relying unduly on the state exchequer.
• The decision associating creation of strong and competitive banks would entirely be based on commercial consideration.

The decision of PSU banks merger list has been asked by Mr. Arun Jaitely, to consolidate state-run banks having a market share of about 70% and also having approx. 80% of bad loans in the Indian banking system, is focussed on building scale and strengthening their risk-taking ability.

The idea of bank mergers was first initiated around since at least 1991, when former Reserve Bank of India(RBI) governor  M. Narasimham suggested the merger of government banks into a three-tiered structure, with 3 large banks with a foreign presence at the top.

In 2014, the P. J. Nayak panel recommended that the government either merge or make the state-owned banks privately handled. The government has pinned up its hope on the performance of state-owned banks to achieve economies of scale and operational efficiency, while balancing risks in an accurate way after the merger.

Consolidation is also likely to assist in dealing better with their credit portfolio, consisting of stressed assets. Consolidation avoids multiplicity of resources being spent in the same space and bolster the banks to deal with shocks. Jaitley believed that the consolidation plan along with measures such as capital infusion i.e. capital injections in weak banks will infuse a revival.

Recently, the State Bank of India consolidated the operation of five of its associate banks and Bhartiya Mahila Bank with itself, recognizes the first consolidation move in the sector which was accompanied by the bad loan crises. Thereafter, the merger has fostered in reducing the  number of state-controlled banks to 21 from 26.

In parallel with the merger of state-owned banks(i.e. PSU banks merger list), complying of resolving stressed assets in accordance with Basel III norms are required to be done for maintaining a capital adequacy ratio of 10.875% by March 2018 and 11.50% by March 2019. Also, all eyes are set on the introduction of new accounting standards for the banks from 1 April 2018, which necessitates them to make higher provisions.

Which Bank will merge with which Bank?

1. State Bank of India

Associate Banks already Merged: State Bank of Hyderabad, State Bank of Patiala, State Bank of Travancore,  State Bank of Bikaner & Jaipur, State Bank of Mysore

Valuation of Assets:₹20,48,080 crores

2. Punjab National Bank

Banks to be Merged : Oriental Bank of Commerce (OBC), Allahabad Bank, Corporation Bank, Indian Bank

Valuation of Assets : ₹2,60,000 crores

3. Bank of Baroda

Banks to be Merged : United Bank of India, Punjab & Sind Bank

Valuation of Assets : ₹9,37,000 crores

4. Bank of India

Banks to be Merged :Andhra Bank, Bank of Maharashtra, Vijaya Bank

Valuation of Assets : ₹10,90,000 crores

5. Canara Bank

Banks to be Merged :UCO Bank, Syndicate Bank, Indian Overseas Bank

Valuation of Assets : ₹13,82,000 crores

6. Union Bank of India

Banks to be Merged : IDBI, Dena Bank, Central Bank of India

Valuation of Assets : ₹11,80,000 crores

Advantages of PSU Banks Merger

1. Improving efficiency and delivery performance of Public Sector Banks

2. Accessibility of an increased usage of the ATM network by customers

3. The reduction of cross-ATM charges would be done considerably.

4. Smaller banks customers will have the provision to access financial products like mutual funds and insurance products offered by Big Banks.

5. Larger banks have a huge capital base permitting them to provide big-ticket loans by themselves without being a member of the consortium.

Disadvantages of PSU Banks Merger

1. Smaller banks lose access base with every customer.

2. Only a few inter-linked larger banks expose the broader economy in greater percentage to financial risks.

3. The difficulty persists in the handling of human resources; career growth of senior-level managers and other workers.