Bigger and stronger is the new motto as India readies for a massive wave of bank consolidation

Time to get together.
Time to get together.
Image: Reuters/Shailesh Andrade
We may earn a commission from links on this page.

The Indian banking landscape is set for big changes with the government deciding to merge the many state-owned lenders.

The idea is to have stronger, if fewer, banks, a government release announcing the decision said on Aug. 23. It “would facilitate consolidation among the nationalised banks to create strong and competitive banks…(the decision) would be solely based on commercial considerations,” the release said.

Some among the country’s 21 public sector banks (PSBs), like the Bank of Baroda and Canara Bank, are now expected to acquire the smaller ones, such as Dena Bank, Vijaya Bank, UCO Bank, the Union Bank of India, and the United Bank of India, as was reported earlier.

A ministerial committee will be set up to oversee the consolidation process. The proposals received by various banks for merger will be reviewed by this panel and approved if lucrative.

Such consolidation prevents multiplicity of resources being spent in the same area and strengthens banks to deal with shocks, India’s finance minister Arun Jaitley said at a press conference in New Delhi following the announcement. The Reserve Bank of India (RBI), too, has been in favour of such a move.

This will be the second wave of consolidation after the amalgamation of the State Bank of India, the country’s biggest lender, with five of its subsidiaries—and the Bharatiya Mahila Bank—on April 01, 2017. The SBI, as a result, is now among the world’s top 50 banks assets-wise. 

Why it makes sense?

Apart from the nationalised banks, a number of other players operate in the sector today. This includes private, foreign, regional rural, payments, and small-finance banks, apart from the non-banking financial companies (NBFCs).

With all of them chasing the same customer base, the amalgamation of banks with similar frameworks can lead to operational efficiency and economies of scale.

“Consolidation will help by marrying two banks that have similar structures and are chasing the same goal. The banks will be able to better channelise the resources and function more smoothly if they are being controlled by one  strong management team,” said Kalpesh Mehta, partner at auditing firm Deloitte Haskins & Sells.

The mergers are also expected to reduce the pressure on the government to secure capital for PSBs. State-owned lenders may need Rs1.8 lakh crore of capital infusion by FY19, it has been estimated. Of this, Rs70,000 crore will be pumped in by their largest shareholder, the government. The onus to raise the balance is with the banks themselves. The merged, stronger, and competitive entities will, thus, be better placed to attract funds.

The challenges

Bank unions are not very enthused, though. A one-day strike protesting the merger of public-sector banks was organised on Aug. 22 by angry employees fearing the loss of their jobs.

There are other factors, too, that lenders must consider to avoid disruption of the merger process, said the executive director of a small-sized government bank. It “includes financial reach, balance sheet strengths and weakness, the issue of appropriate human resource delegation etc,” the official said requesting anonymity.

This also comes at a time when Indian banking is saddled with a huge pile of bad loans. In March, the total non-performing assets (NPAs) of the sector stood at Rs7.29 lakh crore, around 5% of the country’s GDP. NPAs are loans on which borrowers have stopped repaying either the principal or the interest. There are 18 state-run lenders in the list of 20 banks with highest gross NPAs, a report by CARE, a ratings and research firm, shows. The primary objective of these 18 banks is now to clean up their balance sheets.