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The Big Bank Theory
(Decoding merger of banks )

Half a century after the nationalization of banks, the central government announced the merger of 10 public sector banks with 4 large entities or lenders. This will bring down the total number of banks to 12 from 27. Under the plan, Oriental Bank of Commerce and United Bank of India will be merged with Syndicate Bank, Andhra Bank and Corporation Bank with Mumbai-based Union Bank of India and Allahabad Bank with Indian Bank. Nirmala Sitharaman, the finance minister pointed out that this will help in consolidating a strong national presence of these banks. Along with this, 58000 crores will be pumped into the banking system to recapitalize the banks. The bottom line is clear, which is, to create banks of the global level that can leverage the economies of scale and balance sheet size to serve the needs of a $ 5 trillion economy by 2025.

In simpler words, now a set of questions which raise their heads are –

How did the government decide the combination of banks to merge?

There are many parameters of choosing and the first one is to minimize customer disruptions, so it was decided to merge the banks with similar software. The second determining factor is a geographical presence, line of bank activities, the extent of sharing bank deposits (CASA) etc.

How do these mergers improve the performance matrix of the banks?

Merger alone does not improve the performance matrix, any merger has to happen along with many things, so additional capital is the first requirement i.e. to adequately recapitalize. Reforms should go hand in hand and there have been a whole set of reforms from the last year ease agenda.

How does it help the government ?

For decades, the government has been the biggest shareholder of banks and has provided capital to them. To grow and lend more, the banks often need a higher amount of capital to compensate for the loans that go bad. By reducing the number of banks to a manageable count, the government is in the hope that the demand for such capital infusion will lower progressively with increased efficiencies and with more well-capitalized banks. It will help the government to focus now on fewer banks than in the past.

How will this mega-merger impact the Indian economy or further its chances in becoming a $ 5 trillion economy?

Banks perform the role of intermediaries which means banks can take savings from an individual and make them available for investment. For any economic growth to take place both credit and capital (equity) matter. This help banks to credit loans to the customers and to make big investments in market which will further strengthen the economy.

At last, consolidation alone can not make a difference to the state of Indian banks. Governance of these banks has been a major issue which has dragged down many such banks. According to the former RBI governor, Y V Reddy “If the problem is structural and related to governance, it does not matter whether the banks are large or small.” One can just hope that this decision will help the banks and will not lead to any disruption in our banking system in future.

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