“ The whole idea that the consolidation of
banks will solve the problem of public sector banking is not correct. If the
problem is structural, if the problem is governance, it does not matter whether
banks are large or small”- Dr. Y V Reddy,
former RBI Governor, while delivering the Professor D T Lakdawala Memorial
Lecture on “Future of Public Sector Banking”, 2017
August 30, 2019, Government of India announced a major reform in the banking
sector by merging large PSU banks. The plan is to merge 10 state-owned banks
into four larger ones Banking mergers have been happening frequently in the
last few years, but this time, the consolidation will leave only 12 PSU banks
instead of 27 (as in 2017).
Mergers of banks, globally, have always
led to delays in credit transmission into the economy. India is no different.
At a critical time, when consumer spending has virtually come to a grinding
halt, the need of the hour should have been to ease the flow of liquidity into
the system. Instead, the announcement of this merger will dampen the
transmission of credit into the system in
the near future due
to integration issues like “fit”, redeployment of staff, and fewer career
merger of banks is a correct step, but severely ill – timed, given the current slowdown in the
For years, expert committees viz.,
Narasimham Committee (1991) and Narasimham Committee – II (1998) have
recommended that India should have fewer but larger banks which are better
managed to ensure optimal use of capital, efficiency of operations, wider reach
and higher profitability. The basis is that rather than having several banks
competing for the same market (in terms of deposits or loans) in the same
geographies, leading to each one incurring overlapping costs, it would make
ample logic to have large sized banks some of whom are concentrated majorly in
one geography, or have complimentary presence in few. It has also been argued
that such entities will then be able to respond better to emerging market
trends or shifts and compete more with private banks. The Finance Minister has
said that the proposed big banks would be able to compete globally and improve
their operational efficiency once they lower their cost of lending and improve
The Governments hopes that these mergers
may solve the problems of PSBs, create more efficiencies in the banking system
by reducing NPA and increasing credit activities. Large banks will be more
confident to lend which in turn may revive investments in the economy. The
government also hopes that by merging banks, large behemoths will be created
which may be able to deal with financial situations more resiliently.
It may all be good in the long term and
if the fundamentals of our economy are strong. Not now!
A bigger challenge now for the government
will be in ensuring that there is no disruption in activity, especially
lending, because of the proposed mergers at a time when banks are reluctant to
lend to industry and customers. Our concern is that this announcement and the
long gestation period for executing the mergers will lead to a further slowdown
in credit flow for a while.
Goyal is Director, and Rajarshi Datta is Lead – Asset Management, Acquisory
Consulting LLP. Their views are personal.