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Bank merger: Government to merge 10 PSBs into four, marriage among PNB, OBC and United Bank

FE Bureau
Bank merger, PSB merger, Punjab National Bank, Nirmala Sitharaman, Oriental Bank of Commerce, United Bank,  SBI, NextGen banks, FPI, GDP growth

The government on Friday embarked upon the biggest consolidation exercise in the public-sector banking space, having announced mergers of as many as 10 state-run banks to create four larger entities. This will pave the way for only a few but strong banks to support the rising credit appetite of the economy and reverse a slide in economic growth.

Finance minister Nirmala Sitharaman said Oriental Bank of Commerce and United Bank would be merged into Punjab National Bank (PNB) to create the country’s largest state-run bank after SBI, with a total business of close to Rs 18 lakh crore. Similarly, Syndicate Bank will be amalagamated with Canara Bank, and the broader entity will be the fourth-largest public-sector bank (PSB). Union Bank, Andhra Bank and Corporation Bank will be merged and emerge as the fifth-largest PSB. And the amalgamation of Indian Bank and Allahabad Bank will create the seventh-largest state-run bank.

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The mergers announced on Friday, coupled with the two sets of consolidations done last year, will reduce the number of PSBs to 12 from 27 in 2017. After the merger, India will have 12 “solidly present, well-consolidated, energised, adequately capital endowed banks”, she said. “We are trying to build NextGen banks.”

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Following up on her last week’s decision to come up with two more set of steps to boost faltering growth, the FM also announced the distribution of Rs 55,250 crore of the budgeted Rs 70,000-crore capital among select PSBs to

spur lending. PNB will get the maximum of approximately Rs 16,000 crore (see chart).

Financial services secretary Rajiv Kumar sought to dispel the notion that the government was imposing its decisions on the PSBs. He asserted that consultations with the banks concerned were going on for around six months before the merger decision was taken on Friday, after a meeting with chiefs of these PSBs. Kumar didn’t give a time-frame for the amalgamation exercise to be over, saying the boards of these banks will work out the details.

Sitharaman’s announcement comes on a day when GDP growth collapsed to a 25-quarter low of just 5% in Q1FY20, as consumption plunged and private investors still kept away. She had announced a series of measures, including the removal of super-rich surcharge for FPIs, last week.

The minister said consolidation will help the banks cut costs (due to network overlaps) through optimum utilisation of resources. The government banks will have much bigger balance sheets to fund large projects. Seeking to assure employees of the amalgamated entities, the finance secretary said there won’t be any retrenchment.

Pointing out the rich dividends of the amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank (from April 1), Sitharaman said the retail loan segment of the broader entity has grown as much as 20.5%, against 16.6% for all commercial banks. Similarly, the market capitalisation of BoB after malagamation has grown by Rs 2,000 crore to roughly Rs 37,000 crore now since the merger, with 38 analysts in a Bloomberg poll expecting it to rise to Rs 51,000 crore by August 2020. The minister also said as many as 14 of the 18 PSBs recorded profits in the June quarter, against just two a year before, suggesting that the worst is long over for the state-run banks and now is the best time for consolidation.

“Banks may offer VRS for some people as there will be duplication of work. Officially, no one would like to remove them, but they could be offered VRS, which could make it beneficial for some people to actually quit,” said VG Kannan, chief executive of the Indian Banks’ Association.

The successful experience of merging State Bank of India with five of its subsidiaries and Bharatiya Mahila Bank, and the amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank have given the government confidence that another round of consolidation can be handled without hiccups.

In the Interim Budget 2019-20, the government had said: “Amalgamation of banks has also been done to reap the benefits of economies of scale, improved access to capital and to cover a larger geographical spread.”