Bank mergers point to reform agenda

The Narendra Modi government has kicked off a new wave of restructuring and reforms in the highly stressed banking sector, operating under the assumptions of what has come to be called in half jest the ‘big bank theory’. The decision to merge 10 large nationalized banks into four banks, each with Rs 8-18 lakh crore worth of business, marks a milestone. The decision came on a day when the chips were down, with GDP growth touching a 25-quarters low of 5% in the first quarter of this fiscal. The timing of the merger decision was therefore easily questioned in several quarters, while bank employees have hit the roads opposing the move.

There had hardly been a big reform move for nearly three decades since 1980 when the second phase of nationalization of banks happened. The merger of the State Bank of India (SBI) with its seven associates began in 2008 under the UPA government and ended in 2017 under the Modi government, turning it into India’s largest bank by far with business of a whopping Rs 52.1 lakh crore, a 22.5% market share. In 2018, the government merged Bengaluru-based Vijaya Bank with the Bank of Baroda and Dena Bank. Emboldened by the experience, the Centre has now unveiled the biggest program of bank mergers. Thus, Oriental Bank of Commerce and United Bank of India will merge into Punjab National Bank; Canara Bank and Syndicate Bank will merge; Union Bank, Andhra Bank and Corporation Bank will join to form one entity; and Indian Bank will merge with Allahabad Bank. That the government has left six regional banks out of the mergers, perhaps for the next phase, is significant. The four new bigger banks will gain more muscle in terms of customers, size of business, technological compatibility and geographical reach. Purging administrative costs could be the biggest windfall for these banks.

But the mergers, which are intended to build on volume business, next-generation banking, and to cater to different customer bases and lower the risks to small depositors’ money, should be welcomed. The appointment of chief risk officers, non-official directors and widening of the search for leaders to head these banks point to a reformist agenda. The capital infusion of Rs 55,000 crore into them is another big positive for the banks in transition. The reorganisation of the State-run banks could well unsettle and trigger mergers and acquisitions amongst the big private players like ICICI Bank, HDFC Bank, Kotak Mahindra Bank and Yes Bank. Large foreign banks may also have to rethink their India strategy. Mergers and reforms must now extend to cooperative banks that are in dire straits.