Introduction

In April 2020, the Indian Union Government announced a significant consolidation among public sector banks (PSBs). This action led to the merger of ten banks into four major banking institutions, reducing the total number from 27 to 12. This move was not an impulsive decision but rather part of a much-longer planning process, starting as far back as the 1991 M. Narshimham Committee Report. This article will delve into the reasons behind the merger, its potential impact on the Indian economy, and how it benefits both customers and the banking sector.

Historical Background and Planning

The idea to merge public sector banks can be traced back to the 1991 M. Narshimham Committee Report. Appointed by the government to review the functioning of commercial banks and other financial institutions, the committee recommended establishing a four-tiered hierarchy for the Indian banking structure. This structure was designed to include large banks like the State Bank of India (SBI) at the top tier, 10 national banks with branches all over the country, local banks catering to different regions, and rural banks for agricultural financing.

The April 2020 Merger

On April 1, 2020, the government moved forward with the plan, leading to a significant consolidation among PSBs. The major mergers were as follows:

The United Bank of India and Oriental Bank of Commerce merged with Punjab National Bank. The Syndicate Bank was merged with Canara Bank. The Allahabad Bank merged with the Indian Bank. The Andhra Bank and Corporation Bank were consolidated with the Union Bank of India. Dena Bank and Vijaya Bank were merged with the Bank of Baroda.

These mergers reduced the total number of public sector banks in India from 27 to 12, making the banking sector more streamlined and efficient.

Will the Plan Work?

The question remains: Will these mergers benefit the Indian economy and its inhabitants? To answer this, it is essential to understand the two perspectives of banks: liabilities and assets. Borrowers are the assets of banks, as they earn interest on loans, while depositors are liabilities, requiring banks to pay interest on their savings.

For customers, the immediate impact might be a reduction in the number of bank ATMs and branches, but this can be mitigated by the advent of mobile banking apps and digital technology. These advancements ensure that customers can continue to access banking services online without considerable inconvenience.

For entrepreneurs and small business owners, the merged banks will provide significant advantages. The larger and more consolidated balance sheets of the merged entities will allow for a stronger banking portfolio, leading to increased credit availability and more favorable terms when accessing global markets. This merger, therefore, not only enhances the efficiency of the banking sector but also supports the entrepreneurial ecosystem in India.

In conclusion, the consolidation of public sector banks in India, as of April 1, 2020, was driven by strategic foresight from the 1991 M. Narshimham Committee Report. While customers may experience some short-term challenges, the long-term benefits for the Indian economy and its entrepreneurs are significant, making this a move that aligns with the goals of economic development and growth.