Through mega mergers India’s Modi government is creating fewer, stronger banks

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Booster dose.
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India’s Narendra Modi government is unleashing a slew of policy changes to lift an economy that has lost its mojo.

Today (Aug. 30), finance minister Nirmala Sitharaman announced plans to build “next-gen banks,” through four key amalgamations involving the country’s major state-run lenders.

  1. Punjab National Bank (PNB) will merge with Oriental Bank of Commerce, and United Bank to create India’s second-largest state lender, with a business of Rs17.5 lakh crore ($250 billion), or 1.5 times the current size of PNB.
  2. Canara Bank and Syndicate Bank will merge to create India’s fourth-largest public sector bank (PSB) with a business of Rs15.2 lakh crore.
  3. Union Bank of India (UBI), Andhra Bank, and Corporation Bank will be amalgamated to create India’s fifth-largest PSB. The merged entity will have deposits of Rs14.6 lakh crore, which is twice that of the UBI.
  4. Indian Bank with Allahabad Bank will merge to create the seventh-largest PSB with Rs 8 lakh crore business.

The move will create “adequately capitalised” lenders with a “strong national presence,” and “improved CASA (current account saving accounts).” It also brings down the number of PSBs in the country from 27 in 2017, to 12, said the finance minister.

The finance minister also announced measures to professionalise the functioning of PSBs, including changes to the constitution of banks’ management and boards.

Banks can now also rope in chief risk officers (CROs) with remuneration that is market-linked, and not decided by the government. The CRO will be empowered to monitor the decisions made by the bank.

There may be a strong case for merging PSBs, given successful precedents. Last September, the government had approved the amalgamation of Bank of Baroda, Dena Bank, and Vijaya Bank, effective from Apr. 1 this year. The merged entity reported a profit in the June quarter. Sitharaman stressed that “the best practices” of each bank were replicated in the merged entity.

In 2017, five PSBs, and the Bharatiya Mahila Bank were merged with the State Bank of India.

String of reforms

Today’s measures come exactly a week after Sitharaman proposed a Rs70,000-crore public sector bank recapitalisation plan, aimed at alleviating the liquidity squeeze in the economy, and ensuring easy credit availability.

Sitharaman said today that the measures are starting to bear fruit, with four NBFCs already tapping PSBs for liquidity.

The policy changes of Aug. 23, also included various relief measures for the country’s ailing automobile sector, and a rollback of tax surcharges imposed on wealthy foreign portfolio investors.

The commerce ministry had bolstered these moves by easing the country’s foreign direct investment norms, on Aug. 28, to attract foreign capital. In addition, the RBI stepped in to give the central government Rs1.76 lakh crore of its dividend and surplus reserves, earlier this week.