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Explained: How to read the mergers of public sector banks

The merger announcement was followed by an equity infusion move of Rs 55,250 crore in these banks to enable them to grow their loan book. With these series of mergers, the number of state-owned banks is down to 12 from 27.

, Edited by Explained Desk | New Delhi | Updated: September 1, 2019 5:21:45 pm
Explained: Here is how to read the mergers of public sector banks According to the government, banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform. (File)

The Centre Friday announced a mega amalgamation plan, the third in a row, that merged ten public sector banks into four larger entities, alongside board level governance reforms aimed at improving their financial health and enhancing their lending capacity to support growth.

The merger announcement was followed by an equity infusion move of Rs 55,250 crore in these banks to enable them to grow their loan book. With these series of mergers, the number of state-owned banks is down to 12 from 27.

What does the public sector bank merger entail?

There are four new sets of mergers — Punjab National Bank, Oriental Bank of Commerce and United Bank of India to merge to form the country’s second-largest lender; Canara Bank and Syndicate Bank to amalgamate; Union Bank of India to acquire Andhra Bank and Corporation Bank; and Indian Bank to merge with Allahabad Bank.

The biggest merger out of the four was Oriental Bank of Commerce and United Bank merging into Punjab National Bank to create a second largest state-owned bank with Rs 17.95 lakh crore business and 11,437 branches. These three banks are technologically compatible as they use Finacle Core Banking Solution (CBS) platform.

The merger of Syndicate Bank with Canara Bank will create the fourth largest public sector bank with Rs 15.20 lakh crore business and a branch network of 10,324 branches. Canara Bank will get capital infusion of Rs 6,500 crore. Andhra Bank and Corporation Bank’s merger with Union Bank of India will create India’s fifth largest public sector bank with Rs 14.59 lakh crore business and 9,609 branches. The government announced capital infusion of Rs 11,700 crore for the Union Bank of India.

The merger of Allahabad Bank with Indian Bank will create the seventh largest public sector bank with Rs 8.08 lakh crore business with strong branch networks in the south, north and east of the country. Indian Bank will get equity infusion of Rs 2,500 crore.

What is the logic behind the mergers?

According to the government, banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform. But the move marks a departure from the plan to privatise some of the banks or bringing in a strategic investors to usher in reform in the sector. The government, after consultations, decided that amalgamation is the “best route” to achieve banking sector scale and to support the target of achieving a $5 trillion economic size for India in five years, Finance Minister Nirmala Sitharaman said. Analysts note that the amalgamations will help banks to meaningfully scale up operations but will not lead to any immediate improvement in their credit metrics.

How have previous bank mergers fared?

Last year, the government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country. The government said this merger has been “a good learning experience” as profitability and business of the merged entity has improved. Earlier, the State Bank of India had acquired its associate banks. Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab and Sind Bank, which have strong regional focus, will continue as separate entities.

The government also unveiled governance reforms in public sector banks, providing their boards greater autonomy, flexibility to fix sitting fee of independent directors, longer term to directors at management committee of boards. Post consolidation, banks will also recruit chief risk officer at market-linked compensation to attract best talent, while non-official directors will perform role analogous to independent directors. In a presentation on the proposals, the government said profitability of public sector banks has improved and total gross non-performing assets have come down to Rs 7.9 lakh crore at end-March 2019 from Rs 8.65 lakh crore at end-December 2018.

Will this help improve the performance metrics now?

Analysts are sceptical. ccording to Srikanth Vadlamani, Vice President, Financial Institutions Group, Moody’s Investors Service, while the announced consolidation of PSU banks is a credit positive as it enables the consolidated entities to meaningfully improve scale of operations and help their competitive position, “at the same time, there will not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles”.

Prakash Agarwal, Head- Financial Institution, India Ratings and Research (Fitch Group) also echoed the view. While asserting that bank consolidation is a good move towards improving efficiency of the PSBs, he said “it is possible that the current mergers may face more friction than the last one with BoB, Dena and Vijaya. In that case, a large, well-capitalised strong bank absorbed two much smaller entities. In the present case, the mergers are mostly among larger banks, with absorbing bank not necessarily in strong health. However, given the merged banks are on similar technology platform, the integration should be smoother. Also it is likely that management attention and bandwidth of the entities being merged could get split impacting the loan growth and reduce focus on strengthening asset quality in the short term.

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