Recent Bank Mergers in India: 2019 Overview and Government Plans
The financial sector in India has seen significant changes over the past few years, with major bank mergers intended to streamline operations and improve efficiency. These changes are part of a broader policy framework aimed at modernizing the banking sector and enhancing its competitiveness.
The Narasimham Committee: Background and Recommendations
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Nationalized Bank Mergers as Perounced by the Finance Minister
According to the mega merger plan announced by the Finance Minister Nirmala Sitharaman, several Public Sector Banks (PSBs) across India will undergo consolidation under the Nationalized Bank category. This plan aims to create larger, more robust, and more competitive banking institutions by merging smaller institutions with larger ones. Here’s a detailed look at the mergers:
Oriental Bank of Commerce and United Bank of India
The merger of Oriental Bank of Commerce and United Bank of India with Punjab National Bank (PNB) is expected to significantly boost the latter's market share, making it the second largest bank in the country. This move aligns with the strategic objective of growing nationalized banks into significant financial powerhouses.
Canara Bank and Syndicate Bank
Another major consolidation will see the union of Canara Bank and Syndicate Bank to form the third-largest nationalized bank. This merger aims to enhance the operational efficiency and financial strength of the merged entity, ensuring that it can better serve the banking needs of millions of Indians.
Union Bank of India, Corporation Bank, and Andhra Bank
Yet another planned merger involves the combination of Union Bank of India, Corporation Bank, and Andhra Bank. Additionally, Allahabad Bank will be merged with Indian Bank. These mergers seek to create a more unified and strategic approach to banking services, thereby improving the overall service delivery to the public.
Recent Mergers: State Bank of India and Other Banks
During the previous term of the Narendra Modi government, a series of mergers took place in April 2017. Five Associate State Banks and the Bharatiya Mahila Bank were merged with the State Bank of India (SBI), the largest bank in India. In early 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda (BoB), representing the second major bank consolidation in the country.
Excluded Banks and Political Considerations
Not all Public Sector Banks are slated for merger. Central Bank of India, Bank of India, Bank of Maharashtra, Indian Overseas Bank, United Commercial Bank (UCO Bank), and Punjab and Sind Bank have been excluded from the previous merger plan. Here are the reasons for these exclusions:
Political Considerations
The decision to exclude certain banks from the merger plan appears to be influenced by political considerations. For example, keeping an eye on the upcoming Maharashtra Assembly elections, the government might have decided not to merge Bank of Maharashtra to avoid potential political backlash. Similarly, excluding United Commercial Bank (UCO Bank) from the merger plan may be due to the BJP's desire to maintain a political presence in Kolkata, a politically sensitive city in West Bengal.
Economic and Financial Reasons
Some of the excluded banks are also grappling with significant Non-Performing Assets (NPAs). For instance, Punjab and Sind Bank, Bank of India, and Central Bank of India are burdened with large NPAs. These financial challenges make these institutions less appealing for merger. Furthermore, IOB, located in Chennai, is also to be excluded as it faces numerous NPAs, and the government likely wishes to avoid potential political backlash in Tamil Nadu by merging a troubled bank with others.
Conclusion
The recent bank mergers in India, as detailed above, represent a significant step in the ongoing process of financial sector reform. While these mergers aim to enhance the efficiency and competitiveness of the banking sector, political considerations also play a crucial role in the decision-making process. The government's strategic plan to create larger and more robust banks will likely benefit the Indian economy in the long run, but the complexities involved in the process highlight the challenges of such large-scale financial reforms.