NextGen PSBs: Govt unveils mega bank mergers to revive economic growth

The government on Friday unveiled a plan to merge 10 public sector banks (PSBs) into four, reducing the number of state-owned banks from 18 to 12, in a bid to create “next-generation” financial institutions with stronger balance sheets and bigger risk appetite.

Punjab National Bank (PNB) will take over Oriental Bank of Commerce (OBC) and United Bank of India (UBI) to become the country’s largest lender after State Bank of India (SBI) in terms of business. Canara Bank will subsume Syndicate Bank; Andhra Bank and Corporation Bank will merge with Union Bank of India; and Allahabad Bank will become part of Indian Bank.

Finance Minister Nirmala Sitharaman made the merger announcement an hour before the government released the data showing India’s economic growth had slowed to an over six-year low of 5 per cent in the April-June quarter.

“Having done two rounds of bank consolidation earlier, this is what we want to do for a robust banking system and a $5-trillion economy. We are trying to build next-generation banks, big banks with the capacity to enhance credit,” Sitharaman said, adding that scaling up would allow banks to have a lot more resources, and lending cost would come down. The government has no plans for any more PSB mergers. “For now, the final number is 12,” Finance Secretary Rajiv Kumar said when asked if the government wanted to merge more PSBs in future.

He assured that “no employee will be at a loss” and the merger exercise would not lead to retrenchment. The key factors for the mergers were: Technological platform, customer reach, cultural similarities, and competitiveness, Kumar added. In 2017, India had 27 PSBs, but the National Democratic Alliance government implemented two rounds of mergers in its previous tenure. One was the merger of five associate banks and Bharatiya Mahila Bank with SBI (from April 2017); second, Dena Bank and Vijaya Bank merged with Bank of Baroda, which came into effect from April 1 this year.

The government also announced recapitalisation to the tune of Rs 55,000 crore (out of Rs 70,000 crore budgeted for 2019-20). The plan for infusing the remaining Rs 15,000 crore into PSBs will be announced in the next few days. According to the plan, Rs 10,800 crore will be infused in four banks under the Reserve Bank of India’s PCA — Indian Overseas Bank (Rs 3,800 crore), Central Bank of India (Rs 3,300 crore), UCO Bank (Rs 2,100 crore) and United Bank of India (Rs 1,600 crore).

Kumar said the government was confident all these banks would move out of PCA as all of them would meet the required regulatory capital after recapitalisation. The PCA framework restricts a bank’s ability to expand its business.

The biggest chunk of recapitalisation will go to PNB, at Rs 16,000 crore, followed by Union Bank at Rs 11,700 crore — the two anchor banks for merger. Bank of Baroda is set to get Rs 7,000 crore as capital and Canara Bank Rs 6,500 crore.

“It’s good, as the ability to service people and to deploy technology faster will improve. There will be cost rationalisation. We all are operating similar products and serving Indian clients, so putting together the strength helps,” Andhra Bank Managing Director and Chief Executive Officer J Packirisamy told Business Standard.