India’s Mega Banking Merger: Success of Nirmala Sitharaman’s Reforms

India's finance sector is going through a significant transformation, with a major push towards streamlining and strengthening public sector banks (PSBs). Recently, the Finance Minister, Nirmala Sitharaman, announced a mega merger plan for several public banks, aligning with recommendations from the Narasimham Committee of 1991. This strategic move is seen as a crucial step towards enhancing operational efficiency and reducing redundant banking services in the country.

The Narasimham Committee Recommendations

The Narasimham Committee was established in 1991 by the Reserve Bank of India (RBI) to examine the functioning of public sector banks and recommend measures to improve them. One of the key recommendations made by the Committee was the reduction of the total number of public sector banks to 8. The current government is implementing this recommendation, as the previous government had accepted the committee's report.

Details of the Mega Merger Plan

According to the plan, several banks will be merged to form four mega public sector banks (PSBs). The new banks will be among the largest in India, with the capacity to bolster the country's financial sector significantly:

Oriental Bank of Commerce and United Bank of India: These two banks will be merged with Punjab National Bank (PNB), turning PNB into the second largest bank in the country. South-based Banks - Canara Bank and Syndicate Bank: These two banks will merge to become the third largest bank in the country. Union Bank Corporation Bank and Andhra Bank: These banks will be merged. Allahabad Bank: This bank will be merged with Indian Bank.

The proposed mergers come on the heels of several other restructurings, including the May 2017 merger of five associate state banks with the State Bank of India (SBI) and the merger of Dena Bank and Vijaya Bank with the Bank of Baroda (BoB) in April 2019.

Exclusions and Possible Reasons

While the majority of the PSBs are being merged, several others have been excluded from this mega merger plan. The reasons behind these exclusions are varied and often linked to political considerations:

Central Bank of India: Excluded due to uncertain political implications. Bank of India, Bank of Maharashtra, Indian Overseas Bank, and United Commercial Bank (UCO Bank): Excluded due to political and operational reasons. Punjab and Sind Bank: Excluded due to strategic alliance considerations.

For instance, the merger of Bank of Maharashtra (BoM) is specifically excluded to avoid political tensions before the upcoming Maharashtra Assembly elections. Similarly, United Commercial Bank (UCO Bank) and Central Bank of India have been excluded to maintain a balance in Kolkata, a critical political and economic hub in India, and to avoid any adverse reactions from local political parties in Tamil Nadu and West Bengal.

Consequences of the Mergers

The mergers are expected to improve the operational efficiency of PSBs, reduce redundancy, and enhance their ability to handle large-scale financial transactions. With a reduced number of banks, the focus will be on quality over quantity, ensuring that the banking sector in India is more robust and capable of meeting the growing needs of the country's economy.

The success of these mergers will largely depend on how well the merged entities can integrate their systems, processes, and workforce. This will require careful planning and execution to ensure that the benefits of the mergers are realized and that customers continue to experience seamless service.