Government To Merge Ten Public Sector Banks Into Four

The government has announced mega bank mergers as part of a economic reforms package.

Nirmala Sitharaman, union finance minister/ Picture courtesy: T Narayanan/Bloomberg
Nirmala Sitharaman, union finance minister/ Picture courtesy: T Narayanan/Bloomberg

The government on Friday said that it would merge 10 public sector banks into four, bringing down the number of PSU banks to 12 from 21.

The PSU bank mergers would help in better management of capital, said Finance Minister Nirmala Sitharaman while announcing the proposal as a part of a package of ‘reforms’ for the economy. She also announced a series of governance of government banks in the hope that the capital infused by the government into the lenders would result in stronger banks.

According to the plan:

Consolidation among public sector banks has been on the agenda for the National Democratic Alliance since 2014, when it first came into power. In 2017, State Bank of India was merged with five of its associate banks and Bharatiya Mahila Bank. In 2018, the government decided to merge Bank of Baroda with Vijaya Bank and Dena Bank. The government also allowed Life Insurance Corporation of India to take over 51 percent equity in IDBI Bank Ltd., effectively privatising it.

The Acquirer Banks

In deciding on the combinations for final bank mergers, the government has picked some of the larger and relatively stronger banks to be the acquirer banks. The combined entities will control 82 percent of all public sector banks and 56 percent of all commercial bank businesses.

Punjab National Bank

Punjab National Bank will see itself take over Oriental Bank of Commerce and Kolkata-based United Bank of India. This will form India’s second largest public sector bank, after State Bank of India. The combined business of all three banks is 1.5 times higher than PNB’s existing business, said Sitharaman. The combined advances base of the merged bank will be Rs 7.5 lakh crore. The deposit base will stand at Rs 10.43 lakh crore.

The bank merger comes at a time when PNB continues to have its own set of issues. The bank is just about recovering from the near $2 billion Nirav Modi fraud and still has a high level of non-performing assets. Its gross NPA ratio stood at 16.5 percent as of June 2019.

The bank reported a capital adequacy ratio of 9.77 percent, at the end of the first quarter. To enable the bank to go through with the acquisitions, the government may have to supply more capital to PNB. The bank will receive Rs 16,000 crore worth capital from the government to complete the merger.

Canara Bank

Canara Bank will take over Syndicate Bank. This will form the fourth largest public sector bank. The combined advances base of the merged bank will be Rs 6.61 lakh crore. The deposit base will stand at approximately Rs 8.6 lakh crore. The combined entity will be the fourth largest public sector bank in the country.

Canara Bank had a relatively lower gross NPA ratio of 8.77 percent ahead of the merger. The state-owned lender’s capital adequacy ratio as on June 30 was at 11.7 percent. The lender will get Rs 6,500 crore worth capital from the government.

Union Bank of India

Union Bank of India will see itself take over Andhra Bank and Corporation Bank. The combined advances base of the merged bank will be Rs 6.39 lakh crore. The deposit base will stand at Rs 8.2 lakh crore. It will be the fifth largest public sector bank in the country.

Union Bank, too, has a high gross NPA ratio of 15.18 percent. Its capital adequacy ratio at the end of the first quarter stood at 11.43 percent. The government will infuse Rs 11,700 crore worth capital in Union Bank, for the merger.

Indian Bank

Indian Bank, which has long been touted as one of the best performing public sector banks, will merge with Allahabad Bank. The combined entity will have an advances base of Rs 3.51 lakh crore and a deposit base of Rs 4.56 lakh crore.

Indian Bank had a bad loan ratio of 7.33 percent. Its capital adequacy ratio at the end of the first quarter was at 13.62 percent. Indian Bank will receive Rs 2,500 crore worth capital from the government to complete the merger.

Near Term Pain?

Analysts said that while consolidation is positive is positive in the medium term, the banking system could face temporary problems emerging from such wide-spread consolidation.

According to Krishnan Sitaraman, senior director at Crisil Ratings, the problems could range from human resources-related problems to technological hiccups Any such large scale integration exercise does entail some short-term challenges like managing cultural differences, manpower and branch rationalisation and technological integration, Sitaraman said. “If implemented well, it can bring in structural benefits over the medium term, enabling PSBs to compete more effectively with other constituents in the financial sector landscape,” he added.

Anil Gupta of ICRA Ratings said that looking at recent experiences of mergers in State Bank of India and Bank of Baroda, the current merger could face some issues with respect to the management bandwidth.

Recent precedence show the amalgamation process takes up to six months and the management bandwidth of the merging banks may get occupied amid this process...The choking of management bandwidth should not result in slowdown in credit flow to the economy.
Anil Gupta, Sector Head - Financial Sector Ratings, ICRA

The government may also need to cough up more capital as banks go through the merger process, said Saswata Guha of Fitch Ratings India. According to him, the Rs 70,000-crore capital infusion will not be adequate to cover consolidation-related cost as well as growth. Fitch Ratings estimates that the public sector banking system could end up needing an additional Rs 90,000-100,000 crore worth capital to be able to grow further.

Srikanth Vadlamani, vice president for the financial institutions group at Moody's Investors Service said that consolidation of PSU banks is a “credit positive” as it enables the consolidated entities to meaningfully improve scale of operations and improve competitiveness. “At the same time, there will not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles,” he said.

Consolidation will also provide scope for improvement in corporate governance, and the measures announced to improve the functioning of banks’ boards are a step in that direction. These measures, though, are incremental rather than structural, and the quality of their implementation will determine their effectiveness.
Srikanth Vadlamani, Vice President - Financial Institutions Group, Moody’s Investors Service