Big Bang Banking Reforms: Consolidation of Indian Public Sector Banks
Bhumesh Verma 31 Aug 2019

Big Bang Banking Reforms: Consolidation of Indian Public Sector Banks

Contributed by Harshita Verma

With an aim to strive towards a USD 5 trillion economy and cleaning up the banking sector notoriously saddled with NPAs, the Government of India has prescribed the consolidation pill yet again.

Yesterday, the Finance Minister announced another significant round of consolidation of Indian Public Sector Banks (PSBs) with 10 of them being merged into 4. With a total of 12 PSBs remaining now, compared to 27 in 2017, there could be a sense of increasing global competitiveness, economies of size and scale for Indian PSBs.

Canara Bank and Syndicate Bank to be merged (anchor bank Canara Bank). Consolidated Canara Bank and Syndicate Bank will be 4th largest public sector bank with  ₹15.2 lakh crore business.

Andhra Bank and Corporation Bank will be merged into Union Bank of India. Consolidated Union Bank of India, Andhra Bank and Corporation Bank will become the 5th largest public sector bank with Rs. 14.6 lakh crore business.

Indian Bank will be merged with Allahabad Bank (anchor bank - Indian Bank) - Consolidated Indian Bank and Allahabad Bank will be 7th largest public sector bank with Rs 8.08 lakh crore business.

Similarly, Punjab National Bank will subsume Oriental Bank of Commerce and United Bank.

Some of the other measures envisaged are the following:

1. Non official directors will perform a role analogous to individual directors.

2. PSBs are enabled to do succession planning.

3. Making the management accountable to the board, the board committee of nationalized banks will appraise performance of the General Manager and above including Managing Director.

4. The Chief Risk Officer will be given market linked compensation to attract the best talent.

5. Boards will be given the flexibility to fix sitting fee of individual directors.

6. Boards will have the flexibility to introduce the chief General Manager as per business needs.

Many positive changes are likely to come about, including the following:

1. Reduction in the gross Non Performing Assets (NPAs)

2. Increase in the provision coverage ratio; it being the highest in the 7 years.

3. Increased capital size and enhanced liquidity leading to increased operational strength and improved profitability.

4. Larger reach of the banks resulting in greater financial inclusion and provision of better/greater variety of services for customers.

5. Enhanced risk appetite and a strong national and global presence of Indian PSBs.

The government is reassuring that while the banks will grow and some rationalisation of operations will take place, no employees will be retrenched. Else, the entire exercise could prove to be counterproductive in the present atmosphere of gloom surrounding job losses across sectors.

This major reform has the potential to generate new vigour in the Indian economy and enable it to become a USD 5 trillion economy.

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