The mega merger of public sector banks, reducing their number to 12 from 27 earlier, is by far the most disruptive move in the banking industry since nationalisation and a step in the right direction. However, the consolidation of banks alone will not serve as a panacea.
It must be followed up by reforms in governance so that the banks can drive the efforts to make India a $5 trillion economy by 2025. Ten public sector banks have been combined under four new merged entities. There are multiple benefits from the merger: enhanced capacity to increase credit, strong national presence and global reach, increased risk appetite, quick adoption of modern technology, wider product offerings with augmented customisation, better ability to raise resources from markets and reduction in lending costs due to improved operational efficiency.
However, the biggest challenge in implementing the amalgamation is the integration of technology platforms and managing HR-related issues. While consolidation is a long-term objective, it must be remembered that the merged banks will continue to suffer from many of the same drawbacks that afflict the public lenders at present. The fact remains that they will continue to be under government’s control with a heavy baggage of Non-Performing Assets (NPAs), notwithstanding the tall talk of governance reforms. In March this year, the NPAs stood at Rs 7.9 lakh crore. Moreover, the PSBs continue to be revenue guzzlers with the government spending Rs 1 lakh crore on recapitalisation in the last fiscal alone.
In an economy where the share of bank lending to the GDP remains very poor, there is a need for increased competition for providing credit which can be achieved by promoting privatisation of banking industry. It is heartening that the RBI has liberalised regulations for granting licences for regional banks and payment banks. There is an urgent need to remove the shackles on the payment banks that have resulted in stunting their operations and granting more licences to private banks without compromising on eligibility norms. On the other hand, the managements of the merged PSBs must be given the freedom to harmonise branches, redeploy staff and accelerate voluntary retirement schemes. Without such measures, the benefits of the bank mergers in terms of cost efficiency will not materialise.
Each bank should feel more responsible for its own lending and not rely on a merchant bank’s appraisal as they did in the past. The ability to operate in a competitive environment is very important. While merger may not be a magic wand to end all the problems of the public sector banks, it can be the beginning of a process to make them play a key role in the growth of the economy.