Whether mergers of public sector banks will solve the banking crisis in India ?

The nationalization of Banks in 1969 paved the way for growth of banking business in the country with improvement in economy. Banking was perceived as a lucrative white collar job with security and respectability in the society. Further nationalization of another set of  banks happened in early 1980s considering the success of nationalization of Banks in 1969. There were few mergers of Banks ( co-operative and private sector Banks)  during this era which was mandated by Government because of regulations/non performance  . However largely public sector banks were unaffected and continue to grow strong .With the liberalization of economy, licenses were issued to few corporate houses in 1994 and with modern technologies, innovative products and service offerings, these banks gave stiff competition to public sector Banks. Reserve Bank of India recently issued licenses to payment Banks and small finance Banks to cater to specific segments and providing accessibility of banking services to customers in rural segment.

With the increasing Non Performing Assets ( NPAs) in many public sector Banks, poor business growth and lack of technology initiatives for customer engagement, stiff competition from new Banks, public sector Banks face serious challenges for performance and survival. While measures are being taken to improve quality of service, digitalization and customer reach, these public sector Banks have lagged down behind the private sector Banks and other foreign Banks operating in India. The nationalized Banks failed to service the rural community and improve financial inclusion in the country . The reasons could also be attributed to the presence of Regional rural and cooperative Banks/credit union in this area but the inclusion overall was limited. The credit delivery in unorganized sector/small and medium enterprises remained a challenge while the public sector Banks continue to finance large industries/infrastructure projects. There was minimal growth in retail loan segment including mortgage/housing loans through public sector Banks and specific institutions spruced up during this time- housing finance institutions, vehicle loan institutions etc. The frequent policy changes of the Government, the macro and micro economic factors in many industries also contributed to growing stressed assets. Many initiatives like Lead Bank scheme, priority sector loans, agriculture loans, other Govt programmes failed to provide the necessary impetus for disbursement of loans in the unorganized sector.

After an existence of close to 50 years, performance of some of the public sector Banks are under scrutiny with mounting NPAs and erosion of capital. For the last few years, Government was trying to bail out the banks by pumping more capital or looking at alternative measures. In line with Narasimhan committee recommendations for banking sector reforms, Government was planning to merge few public sector banks for better economic and commercial sense. The committee recommended earlier to improve Capital Adequacy ratio (CAR), improve Asset Quality, improve existing systems and methods in Banks and solve existing structural issues. However as is the case with many committee recommendations, the implementation of these measures were relatively slow with minimal impact though Government/Reserve Bank tried their part amidst stiff resistance from staff/Unions.

To conclude, the mergers of public sector Banks is inevitable and whether merger of large banks alone will solve the current problems faced by Banking industry in the country is debatable. There has to be many more proactive measures to be adopted by Government/regulators and the management of Banks which can help in

a)      Capital improvements

b)      Low NPA levels

c)      All India presence and reach to the unbanked

d)      Improve business and balance sheet size

e)      Digital growth and engagement

f)       Improve customer service

g)      Automation and efficiency

While monitoring of Banks will be easy for Central Bank and infrastructure cost will be reduced for the larger Banks after merger, unless proactive measures are being taken for efficient credit monitoring, control and reduction of NPAs with effective customer engagement through digital means, the mergers may not provide the desired results as perceived by Central Bank of the country/Government.