[Answered] “Merging of banks would nudge India towards a $5-trillion economy but carry significant risks.” Comment.

Public Sector Banks (PSBs) in India are fragmented, with some of them reeling under the mounting pressures of Non Performing Assets (NPAs). Constant failure of banks to provide credit to both emerging and existing industries has resulted in stagnation in the economic growth of the nation. Recently government has merged major banks to transform the, into banks of global scale that would help India to grow towards $5 trillion mark. But there are many intrinsic risk involved with merger of banks which need to be considered.

How merger of banks would help in achieving $5 trillion dream?

1. The merger helps in financial inclusion and broadening the geographical reach of the banking operation. Thus will ensure inclusive and sustainable growth.
2. With number of PSBs coming down after merger, capital allocation, performance milestones, and monitoring would become easier for the government.
3. Large banks through consolidation of PSBs will have large balance sheets which can meet credit needs of growing Indian economy.
4. It will also build capacity in PSBs to raise resources without depending on the state exchequer.
5. Merger leads to availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more in small banks. This will help in reducing NPA issues and would help in better credit services.
6. Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
7. The disparity in wages for bank staff members will get reduced. Service conditions get uniform. Thus it will allow bankers to be motivated to work more efficiently providing banking services at faster and efficient pace.
8. Merger sees a bigger capital base and higher liquidity and that reduces the government’s burden of recapitalising the public sector banks time and again. Thus government can use this public fund for other developmental activities.
9. Redundant posts and designations can be abolished which will lead to financial savings allowing fiscal savings.
10. The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
11. In the global market, the Indian banks will gain greater recognition and higher rating. This will attract foreign investment.

Risks of bank mergers:

1. Many banks have a regional audience to cater to and merger destroys the idea of decentralisation. This would hamper credit service in rural areas and may add to NPAs due to inability to manage from centre.
2. Larger banks might be more vulnerable to global economic crises while the smaller ones can survive. A failure of bank would have bigger and larger impact.
3. Merger would burden stronger banks to cover up the the weakness of inefficient banks. This may lead to inefficiencies and delays.
4. Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks.
5. The number of public sector banks will come down, perhaps to 6 or 7, after the proposed consolidation of banks. This will end the unhealthy and intense competition going on even among public sector banks as of now.  While professional competition in the market place is welcome, unhealthy competition may lead to many unethical practices and regulatory violations as noticed at present.
6. The weaknesses of the small banks may get transferred to the bigger bank also. This was seen during previous amalgamations.
7. Mergers may result in clash of different organisational cultures. Conflicts will arise in the area of systems and processes too.

Governance of public banks needs to be improved before making any significant change in any emerging architecture. Bigger banks offer more resilience to the banking sector but overlooking bigger red flags like strong credit appraisal and risk control system would do little help in creating robust banks. Therefore due focus on ensuring strong foundation of PSBs is important.