{"id":51902,"date":"2019-09-05T19:00:22","date_gmt":"2019-09-05T13:30:22","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=51902"},"modified":"2019-09-05T17:31:41","modified_gmt":"2019-09-05T12:01:41","slug":"7-pm-bank-for-the-buck-5th-september-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-bank-for-the-buck-5th-september-2019\/","title":{"rendered":"7 PM | Bank for the buck | 5th September, 2019"},"content":{"rendered":"\n<p><strong>Context:<\/strong> consolidation\nof banks<\/p>\n\n\n\n<p><strong>More in news:<\/strong> In\nwhat comes as the second wave of the government\u2019s efforts to revive the\neconomy, Finance Minister Nirmala Sitharaman on Friday announced a slew\nof&nbsp;<a href=\"https:\/\/www.thehindu.com\/tag\/813-810-684\/banking\/?utm=bodytag\" target=\"_blank\" rel=\"noreferrer noopener\">banking&nbsp;<\/a>reform\nmeasures, including merger of 10 public sector banks into four entities. <\/p>\n\n\n\n<p><strong>Need\nfor bank mergers in India:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Fragmentation:<\/strong> Indian\nbanking sector is highly fragmented, especially in comparison with other key\neconomies. Additionally, most of the PSBs in India are competing within\nthemselves; most of them have same business models and compete in the same\nsegments as well as same geographies. Thus, there is a huge scope of\nconsolidation in this sector.<\/li><li><strong>Credit\ndemand:<\/strong>\nIndia needs to have large banks (global sized banks) that can support the\ninvestment needs of economy and sustain economic growth. To meet the growing\ncredit demand of the economy, the Public Sector Banks need to be well\ncapitalized and need to enhance their capacity to lend to larger companies and\nlarger projects. <\/li><li>Consolidation of Public Sector Banks\ninto 4 or 5 banks would create larger banks with capacity to fund larger size\nprojects of economic importance.<\/li><li><strong>Capital\nbase:<\/strong>\nPublic Sector Banks (PSBs) which form approximately 72% of the Indian banking\nsystem are among the most affected by the high non-performing asset (NPA)\nproblem at present. This has further resulted into a slowdown of credit growth\nin our economy, thereby reducing private investment and our potential economic\ngrowth.<\/li><li>There are suggestions that a\nconsolidation of PSBs can help them manage the challenge of NPAs more\neffectively. In effect, it is argued that a large bank will be better\ncapitalized, will have deeper expertise to handle large credits and large NPAs<\/li><li><strong>Capital adequacy:<\/strong> Clearly,\nthe core idea behind exploring merger of banks is to enable creation of large\nsized banks of adequate capital base to enable disbursement of greater credit,\nespecially for large developmental projects as well as for effective management\nof NPAs. <\/li><li>Hence, the likely capital size of the\nmerged entity needs to be considered while evaluating the decision for\nconsolidation. As discussed earlier, with SBI merging with its 5 associates and\nBharatiya Mahila Bank, the remaining 20 banks if consolidated into 4 large\nbanks, the average size of assets of the merged entity would be around Rs\n15.5lakh crore.<\/li><li><strong>Cost\nrationalization:<\/strong> Merger of two or more banks should thus ideally\nresult into value maximization and efficiency gains. The benefits may entail\nthrough rationalization of branches, productivity gains through proper\ndeployment of skilled resources, common treasury pooling, enhanced scale of\noperations and rationalization of common costs. <\/li><li>Additionally, the volume of inter-bank\ntransactions will also come down, resulting in saving of time in clearing and\nreconciliation of accounts. However, these cost benefits need to be carefully\nweighed against other parameters such as the likely increase in non-performing\nassets, and loss of business with closure of some branches.<\/li><\/ul>\n\n\n\n<p><strong>Challenges\nand problems of merger:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Human\nresources:<\/strong>\nOne of the most challenging problems which could hinder the consolidation\nprocess would be in terms of human resource integration and management as many\nemployees would fear job loss and disparities in the form of regional\nallegiances, benefits, reduced promotional avenues, new culture, etc. <\/li><li>To ensure that the integration of\nentities is a smooth process, the most important task would be to embark on a\nhuman resource strategy that can help address the core concerns of employees,\nmitigate their anxieties, and create an environment of trust.<\/li><li><strong>Technology:<\/strong> Another\nbig challenge for integration post banks\u2019 merger relates to integration of\ntechnology as various banks are currently operating on different technology\nplatforms. <\/li><li>Systems integration plays an important role\nas it involves integration of infrastructure components such as data centers,\noperating platforms and enterprise applications, and alignment of IT and\nbusiness strategies of the merging entities. <\/li><li>Hence, IT integration strategy should be\naligned with the business strategy right from the beginning to ensure a\nsuccessful merger.<\/li><li><strong>Regulation\nand control:<\/strong> From regulatory perspective, monitoring and control\nof less number of banks will be easier after mergers. Also, for meeting the\nnorms under BASEL III, for ensuring capital adequacy ratio, the larger banks\nwill be at ease. <\/li><li>However, it has also been argued that a\nfailure of a very large bank may have macro implications on the economy and may\nhave to be bailed out during stress periods. Existence of excessively large\nbanks may also create significant moral hazard costs for the entire system as\nwitnessed during the Lehman collapse in 2008.<\/li><\/ul>\n\n\n\n<p><strong>Way\nforward:<\/strong>\n<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>From a global perspective, the\nconsolidation process among banks has been driven primarily by synergies,\nefficiency, cost saving, and economies of scale. <\/li><li>It is essential to evaluate the proposed\nmerger of banks by assessing the likely benefits such as cost rationalization,\nadditional business, etc. against the likely future costs that may arise on\naccount of harmonization of various procedures, technology and integrating\nhuman resources. <\/li><li>It is also essential that banks work to\nmitigate exposures in areas related to interconnectivity, the market,\nregulatory compliance, credit quality, etc.<\/li><li>These risks can be mitigated through\nadvance planning and due diligence to ensure a smooth transition. The\nconsolidation process in India should aim at strengthening the banks&#8217;\nbargaining power, help save costs; improve supervision and corporate governance\nacross the banking system. <\/li><li>Besides, the government along with RBI\nshould also start streamlining the PSBs especially in terms of their chosen\nareas of business so as to help them to focus on their core capacity and\nstrengths in the times ahead.<\/li><\/ul>\n\n\n\n<p>Source: <a href=\"https:\/\/indianexpress.com\/article\/opinion\/columns\/public-sector-bank-merger-nirmala-sitharaman-5966812\/\">https:\/\/indianexpress.com\/article\/opinion\/columns\/public-sector-bank-merger-nirmala-sitharaman-5966812\/<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: consolidation of banks More in news: In what comes as the second wave of the government\u2019s efforts to revive the economy, Finance Minister Nirmala Sitharaman on Friday announced a slew of&nbsp;banking&nbsp;reform measures, including merger of 10 public sector banks into four entities. Need for bank mergers in India: Fragmentation: Indian banking sector is highly&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-bank-for-the-buck-5th-september-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | Bank for the buck | 5th September, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":49370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-51902","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2019\/07\/7-PM.png?fit=1000%2C500&ssl=1","views":{"total":0,"cached_at":"","cached_date":1704763735},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/51902","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=51902"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/51902\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/49370"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=51902"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=51902"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=51902"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}