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Mega bank mergers on the cards for India

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Mega bank mergers on the cards for India

On Friday, Finance Minister Nirmala Sitharaman revealed the mega amalgamation plan. The plan was to merge 10 public sector banks into 4 large entities. After the nationalization of banks that took place 50 years ago, the government took this step to improve the financial health of bank and to amplify their lending capacity.

The economic growth which had been running low for 6 years would be boosted by the stronger lenders and acquire a global scale. In order to assist these banks to enable them to grow their loan book, the finance minister announced a move to infuse equity of Rs. 55250 crores in these banks. On the basis of their operating efficiencies, technological platform and better usage of equity, these banks have been merged.

More details of the mergers

Punjab National Bank, Oriental Bank of Commerce and United Bank of India will merge to become the second largest lender in the country after State Bank of India with a business of Rs. 17.95 lakh crore and 11,437 branches in the country. The fourth largest lender will be created by the consolidation of Canara Bank and Syndicate Bank. Amalgamation of Union bank, Andhra Bank and Corporation Bank will lead to the formation of the fifth largest lender. Indian Bank is also merged with Allahabad Bank.

The government decided that privatizing these banks or introducing strategic investors to them was not the best way to achieve banking sector scale. Instead it was decided that amalgamating the banks may help to achieve the target of attaining a $5 trillion economic size in five years for India. The merging of the banks will certainly help them to scale up. Even though the fund infusion will provide the necessary capital to enable the banks to amplify lending, it is debatable that whether amalgamation will lead to any immediate development in their credit metrics.

What else should you know?

Oriental Bank of Commerce, United Bank of India and Punjab National Bank use Finacle Core Banking Solution platform. So they are compatible technologically. The finance minister announced that a fresh capital infusion of Rs. 16,000 crore will be given to Punjab National Bank.

Both Syndicate Bank and Canara Bank use iFlex Core Banking Solution Platform. So they are compatible. Together they will create a business of Rs. 15.20 lakh crore and 10,324 branches in the country. A capital infusion of Rs. 6500 crore will be given to Canara Bank.

Merging of Andhra Bank, Corporation Bank and United Bank of India will create a business of Rs. 14.59 lakh crore and a network of 9609 branches in the country. A capital infusion of Rs. 11,700 crore has been announced by the government to the United Bank of India. These three banks are compatible together as they work on Finacle Core Banking Solution Platform.

Both Allahabad Bank and Indian Bank BaNCS technology platform. So they are compatible together. With a business of Rs. 8.08 lakh crore and a strong branching network in the country, they will create the seventh largest public sector bank. An equity infusion of Rs. 2500 crore has been given to Indian Bank.

Last year, Dena Bank, Vijaya Bank and Bank of Baroda had also been merged together creating the third largest bank in the country by loans. There has been significant improvement in the business and profitability of the merged entity.

The take-away

There were 27 public sector banks in 2017 which has been reduced to 12 after the announcement. These well consolidated banks with sufficient capital will help India to achieve the $5 trillion economy target. Bank of India, Punjab and Sind Bank, Central Bank, Indian Overseas bank, UCO bank and Bank of Maharashtra – these six banks are not a part of the amalgamation plan and will remain working as separate units.

There will be significant improvement in the scale of operations of these consolidated public sector banks. Their competitive position in segments like corporate where they have a low share of customers and sub-scale operations on retail loans will also be enhanced.

 

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