How The Mega Bank Merger Will Impact Indian Economy?

questions that come into mind when we think of bank mergers.

Indian economy is already delightful for its roller collar ride ever since the Modi government came into existence. Lately, adding to this ride is the historical decision, under which 27 public sector banks, including the second-largest bank PNB being merged and reduced to 12. This decision will impact almost every other individual who has their bank account associated with these major banks. 

Reasons for Bank Merger

The minister of finance, Nirmala Sitharaman in her former handout said that in order to create next-generation banks. It is very important for India to become a $5 trillion economy within the subsequent 5 years. Hence, mergers are the way to achieve that wider capital base. 

The following can be considered as major reasons or advantages behind the mergers.

1. To Cover NPA and Absorption of Losses:

NPA refers to the non-performing assets or loan for which principal or interest payment remained overdue for a period of 90 days or more. Indian economy is currently suffering from Rs. 71543 Cr. NPA. Hence, a merger somewhere provides a boarder base to absorb the NPA’s.

2. To Reduce Bank Fraud:

As per the latest annual report of the RBI, 2018-19, the amount involved in bank fraud cases increased 35 times in 10 years whereas the number of bank fraud cases detected has increased by 15%.

Note: RBI reports the cases where the amount involved in fraud is 1 lakhs or more.

In the year 2009-10, the amount involved in fraud is around 1999 Cr. This raised to 71,543 Cr in the year 2018-19 i.e. an increase by 35 times. 
It will be more understandable from the bar diagram given below. you can observe the rise in it. Here is the data you can study as per the RBI report. 

The monetary value of NPA as per the RBI report.

Public sector banks account for the majority of banking fraud cases. Hence, somewhere merging of all major PSB will encourage less fraud and more authentications in dealing with services. 

3. The Rise in Capital Base:

When two or more banks come together their financial capacity rises to share more infrastructure in place, accounting, operations, IT which ultimately provide more efficiency and decrease overall institutional risk.

4. Up-gradation of Service and Revenue:

Bank mergers and acquisitions allow the business to upgrade and fill the technological gaps which help to provide better and more productive services which bring more revenues in return. 

5. Penetration to the Market Will Be Easy:

Different banks have reached a different area of the country, the merger of both helps to reach a wider area.

For example:

A has stronger penetration in the western part of India while Bank B has stronger penetration in the eastern part of India. If both Bank A and B mergers, it would cover the majority of the market.

Disadvantages of Mega Bank Merger

1. Destroys the Idea of Decentralization:

Many banks are specialized to provide services to a regional audience only. Hence, a merger will destroy the idea of decentralization.

2. Temporary Relief:

The merger only gives temporary relief but not real remedies to real problems like bad loans and bad governance.

3. Old Banks Will Lose Their Identity:

As in the earlier mergers of banks like state bank of Patiala, state bank of Mysore, etc. losses their identity to state bank of India. Similarly, all merged banks will lose their identity to the major banks.

4. Different Banks Have Different Interest Rates:

All banks used to have their interest rates above the RBI guidelines. However, it is not dear what will happen to the interest rates of those who have loans running with these banks.

5. Poor Culture Fit:

Mergers not only take place one piece of paper but between the two banking families. Hence, mergers without taking their people or culture their people or culture into account a big failure. Hence, thoroughly communication and double-check that employees are accepting of the change is important.

What if the Next Step is Privatization of the Banks?

It is not being said, right now that the public sector banks will be privatized. But it can be predicted from the past experiences of the country. Telecom and the airline sector are considered as one of the major pillars of the country's economy. Earlier, as the government realized it needs to be more effective to serve people greatly, they privatize the whole sector within the span of 10-15 years. Hence, they may be reluctant to privatization in the finance sector at the beginning but later on, they can reshape the sector by stealth. The hope has been to slow the growth of publicly-owned banks and allow privately-owned rivals to gain market share. Hence, if the same theory goes, the sector would effectively have been privatized. 


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