Public Sector Bank merger: the implications

The government has come out with another round of public sector bank consolidation that sees the merger of 10 PSBs into four banks. After the merger, the number of total PSBs will be reduced to 12. This is the major merger since the launch of the current phase of bank consolidation which started with the merger of SBI and associated banks.

Following are the new entities formed after the amalgamation announced by the Finance Minister on 30^th of August 2019.

1. Indian Bank: Indian Bank and the Allahabad Bank will be merged under Indian Bank.
2. Punjab National Bank: PNB, OBC and United Bank to be merged to continue as PNB
3. Union Bank of India: Union Bank of India, Andhra Bank and Corporation Bank to be merged to continue as Union Bank of India.
4. Canara Bank: Canara Bank and Syndicate Bank will be merged to continue as Canara Bank.

Along with this merger decision, the Finance Minister also unveiled some governance reforms for the PSBs besides announcing capital infusion into selected PSBs.

Government says the road map is for 12 PSBs

The latest round of merger consolidates India’s PSBs under 12 banks compared to 27 in 2017 ie, before the announcement of State Bank of India and associated bank merger. This latest phase of consolidation which is the final one according to the Finance Secretary Rajiv Kumar, came when the country is celebrating the 50^th anniversary of first bank nationalization in 1969.

As of now, the road map is final and 12 is the final number; according to the Financial Secretary Rajiv Kumar.

Expected benefits of consolidation

Several benefits are pointed out by the government to support the restructuring of PSBs. When the large entities are created by merging the existing small businesses, it brings some economies of scale advantages like low costs. Following are the main advantages expected by the government out of the consolidation.

1. Operational efficiency will improve: consolidation under big banks will enhance the operational efficiency. Large means the benefit of consolidated control.
2. Reduced number of boards: With reduced number of banks, the government can reduce the number of bank boards as well. Number of boards will come down and the number of board members will be rationalized and reduced.
3. Cost of lending will come down: with less fragmentation, cos structure will come down and this will help to reduce the interest rate for loans and deposits.
4. Enhanced capacity, strong national presence and global reach:

Financial Services  Secretary Rajiv Kumar told that the purpose is to build Next Gen Banks.

Following are the 12 PSBs and their ranks in terms of asset size after the latest round of consolidation.

Table: New PSB structure after the latest consolidation of PSBs

Governance reform package

The Finance Minister also announced some customary governance reforms along with the merger decision. Firstly, PSB boards will be given autonomy and will be enabled to do succession planning. The boards will be also given flexibility to fix sitting fee of independent directors. Non-official directors will perform role equivalent to independent directors.

“To make management accountable to board, board committee of nationalised banks to appraise performance of general manager and above including managing director,” – the Finance Minister Ms Nirmala Sitharaman said while announcing the consolidation.

Second is the appointment of Chief Risk officer with PSBs. According to the FM, a Chief Risk Officer will be appointed from the market by providing market linked salaries. Chief General Managers will also be appointed.

Capital infusion

The government also announced capital infusion plan along with the new merger scheme. Capital infusion totalling over Rs 55,000 crore into nine public sector banks is to be made in the coming months. The banks and their respective capital infusion size are: PNB ( Rs 16,000 crore), Union Bank of India ( Rs 11,700 crore), Bank of Baroda ( Rs 7000 crore), Indian Bank ( Rs 2500 crore), Indian Overseas Bank ( Rs 3800 crore), Central Bank ( Rs 3300 crore), UCO Bank ( Rs 2100 crore), United Bank( Rs 1,600 crore) and Punjab and Sind Bank ( Rs 750 crore).

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