The Future of Indian Public Sector Banks: Merger or Privatization
As of the current date, no exact timeline can be confirmed for the merger of Indian public sector banks. Despite the government's focus on merging these banks, unions are also opposing the initiative, leading to potential conflicts and strikes. Therefore, it would be highly unwise to specify a definitive timeline within which the merger will be complete.
The Central Government proposed the merger of subsidiaries of State Bank of India (SBI) in February 2017, which was approved by the Cabinet in March 2017. The merger was effective from April 1, 2017. Initial progress was swift, with SBI Chairperson declaring that the process would be completed within three months due to the homogeneity of the group. However, for other nationalized banks, achieving this level of homogeneity is more challenging, potentially extending the merger process by a few months to align software applications.
Factors Delaying the Merger
Wage Revision: Wages for employees are due for revision in 2017, adding another layer of complexity to the merger process. Basle III Requirements: Banks are facing a shortage of capital to comply with Basle III requirements, which is another pressing issue. Non-Performing Assets (NPAs): Addressing NPAs is crucial, as a significant portion of the total NPA of Rs. 8 lakh crore is held by public sector banks (6 lakh crore).In light of these challenges, the completion of the merger may not occur before March 2018. However, it is anticipated that this could happen by the end of the financial year 2018-2019. The banks are facing financial constraints, and addressing these issues will be crucial for their future stability.
Challenges and Potential Outcomes
The Bharatiya Janata Party (BJP) is not pushing for the merger of banks but instead aims to privatize public sector banks. This approach could lead to a chaotic situation.
The Government has appointed the Bank Board Bureau headed by Shri Binod Rai to examine the issues, and an ordinance has been issued empowering the Reserve Bank of India (RBI) to monitor large NPAs of different banks. Given that half of the public sector banks are incurring losses due to large-scale NPAs, they are facing a shortage of capital under Basle III standards.
With the Bankruptcy Laws in place, banks now have the means to liquidate NPAs, providing a potential route to financial stability. Additionally, the government has the option to merge 3-4 nationalized banks into one, following the example set by the merger of five subsidiaries of SBI and the Rashtriya Mahila Bank with the State Bank. Another possibility is the merger of public sector banks that have been incurring losses for three consecutive years.
In conclusion, while the merger of Indian public sector banks may face significant challenges, it is inevitable that changes will occur. The government, in collaboration with regulatory bodies, is taking proactive steps to ensure the financial health and stability of these institutions. Whether through a merger or privatization, the goal remains to strengthen the banking sector in the country.