We come across various reforms made in banking industry very frequently and this time its something big to to made which will make the country’s biggest state-run banks to create much stronger financial institutions.

In the recent talks which is taking place in finance ministry over merger and acquisition of smaller public sector banks by their larger peers. The reason behind this debate is that there is significant overlap among various state-owned banks in terms of branches, mode of operation and clients. Consolidation should enable (state-owned) banks to extract synergies fairly easy and will benefit large banks to have their footprints with a pan-India presence.

Currently, two proposal have come into picture. One proposal suggests Punjab National Bank, Indian Bank and Dena Bank be merged to create a bank with an asset base of more than Rs 9 lakh crore. Another possible combination is Bank of India, Allahabad Bank, Corporation Bank, Bank of Maharashtra and Punjab & Sind Bank to create an entity with an asset base of more than Rs 11 lakh crore. These proposals are being examined on the basis of geography, business mix and information technology systems.
The decision for merger is not an easy one. It involves various challenges and the scenario is same here. Till now only SBI has managed to merge two of its subsidiaries — State Bank of Saurashtra and State Bank of Indore.  Have a look at the challenges:

  • Given the strength of the unions mergers won’t be easy because according to them it will result in retrenchment.
  • Achieving integration of technology as all these banks work on different banking solution platforms.  There will be a lot of issues with business integration and geographical presence.
  • Issue of culture

Reserve Bank of India governor Raghuram Rajan responded that RBI is also open to the idea of mergers that aren’t forced and they are open to voluntary mergers.

According to RBI, state-run banks will need about Rs 4.15 lakh crore to meet Basel-III norms – equity capital of Rs 1.5 lakh crore and non-equity capital of about Rs 2.75 lakh crore. The government, with its fiscal deficit, won’t be able to capitalise banks over a long period. The government is looking at ways to reduce its fiscal burden and also asked banks to reduce government stake to up to 58%.

Click on the following links to read more about the article which was published in the leading newspapers:

a) Economics Times Article
b) Times of India Article

Question for Banks-India users: What do you think the idea put up by finance ministry is appropriate? Give your suggestions

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