Can Bank Mergers Boost Economy

Can Bank Mergers Boost Economy

On 30th August 2019, the Hon’ble Finance Minister, Smt. Nirmala Sitharaman announced the merger of 10 separate PSU banks into four entities. This is the third merger by the NDA government in the last two years. In 2017, 27 banks were reduced to 21. In 2018 the number shrank to 18, and now in 2019, it has become12. The latest mergers announced are:

Banks Merged

Total Business (in crores)

CASA Ratio (%)

Net NPA Ratio (%)

Anchor Bank

Amalgamated Banks

Punjab National Bank, (2nd largest after SBI)

Oriental Bank Commerce & United Bank

17.94 lakhs

40.52

6.61

Canara Bank

Syndicate Bank

15.20 lakhs

30.21

5.62

Union Bank of India

Andhra Bank & Corporation Bank

14.59 lakhs

33.82

6.30

Indian Bank

Allahabad Bank

8.08 lakhs

41.65

4.39

           

Official Figures Released by the Ministry of Finance

Current Economic Scenario

India’s GDP is at an all-time low (5%) in the last six years. This is pinned downed to two reasons – cyclical unemployment and operational flaws. There has been:

  1. 3% dip in private consumption. The overall spending power of the consumer is low.
  2. Crisis in the automobile, agricultural, manufacturing, mining, construction, and real estate sector 
  3. Employment is at an all-time low
  4. The growth rate has dipped in all the areas. For example, the manufacturing industry has seen only a 0.6% growth in the current quarter. Growth in the agricultural industry has only been 2%.

Economic Scenario

 

Bank Mergers – AIM

The recent mergers are done to create fewer but stronger global- sized banks for building a $ 5 trillion economy. The big question is, will these mergers help boost the economy.

 

Bank Mergers – CAN Boost Economy

India’s present economic scenario is very disturbing and alarming. The recent mergers can help the economy revive. 

  1. Reduced number of NPAs should help in curbing bad loans
  2. Increase CASA of banks (Current Account Savings Account balance) should increase capacity to lend
  3. Increased ability to absorb shocks by the stronger banks. This should help in reaping economies of scale 
  4. Fewer banks could improve operational efficiency and management quality. This should help the center track, monitor and control effectively.
  5. Fewer banks mean stronger national presence and global reach

 

Bank Mergers – CANNOT Boost Economy

Just as every coin has two sides, many have the fear that bank mergers cannot single-handedly save the sliding economy. 

  1. The four merged entities have more than 10% of their loan exposure towards NBFCs which is likely to inhibit the flow of credit 
  2. The capital profile and asset quality of the ‘stronger’ banks are in a poor state. The merger of weak banks with stronger ones could turn counterproductive. 
  3. There is a lack of synergy among the amalgamated banks which is not very promising
  4. The restructuring of banks can create unrest in bank employees (even though government has reassured). This could result in fewer bank branches and impact job opportunities, ultimately detrimental to the economy
  5. The combined personnel and non-performing debt of the merged banks could impact the interim profitability. 

 

For sure, bank mergers are not the only solution to re-stabilize the dwindling Indian economy. The government/authorities must take adequate steps to – increase consumer spending power and improve the market sentiment – to boost the economy.

 

Stay informed, Stay ahead and stay inspired with MBA Rendezvous