August 30, 2019
State-controlled public sector banks (PSBs) account for 80 per cent of India’s commercial banking space
The move will lead to only 12 PSBs in place of 27, and will benefit consumers through enhanced access
The consolidation has several benefits, including a strong national presence and enhanced risk appetite
The creation of next-generation banks is imperative for India to become a US$5 trillion economy by 2025
In the context of global economic liberalisation, the Indian banking sector has been going through a phase of reforms aimed at improving the operational efficiency and upgrading to international standards of performance. One of the key features of Indian banking is the dominance of state-owned public sector banks (PSBs), which account for nearly 80 per cent of the industry. However, with 21 such different banks competing with each other, the advantages of a near-state monopoly have been largely neutralised.
Recently, Finance Minister Nirmala Sitharaman announced a big consolidation and streamlining of public sector banks, with 10 major public sector banks to be merged into four, to give public sector banks scale. Under this scheme, Indian Bank will be merged with Allahabad Bank (anchor bank – Indian Bank); Punjab National Bank, Oriental Bank of Commerce, and United Bank to be merged (PNB will be the anchor bank); Union Bank of India, Andhra Bank and Corporation Bank to be merged (anchor bank – Union Bank of India); and Canara Bank and Syndicate Bank to be merged (anchor bank – Canara Bank). The amalgamation will lead to only 12 PSBs in place of 27.
Announcing the decision on August 30, Finance Minister stressed on the importance of a strong national presence and enhanced risk appetite for banks. The consolidation has several major benefits, including an improvement of the loan tracking mechanism, the enablement of succession planning, the flexibility to fix sitting fee of independent directors, and the replication of best practices from each bank in others. Ms Sitharaman also said that the creation of next-generation banks was imperative for India to become a US$5 trillion economy in the next five years.
The most recent and the largest merger in the history of Indian banking was that of State Bank of India (SBI) combining with its five associate banks, with effect from April 2017. With this merger, SBI entered into the league of top 50 global banks. The Government is confident that this consolidation too, will help create strong, globally competitive entities with economies of scale, and will enable realisation of wide-ranging synergies. This will ultimately benefit consumers through enhanced access to banking and other services.