India announces mega merger of Public Sector Banks

India announces mega merger of Public Sector Banks

Venkat Raman
New Delhi, August 31, 2019

India’s Finance Minister Nirmala Sitharaman (Facebook)

The Narendra Modi government is speeding on a wave of reforms, the latest of which covers the finance sector with a mega merger of Public Sector Banks.

Finance Minister Nirmala Sitharaman announced yesterday (Friday, August 30, 2019) four sets of mergers that would eventually see ten State-Owned financial institutions merge.

She did not specify a timeframe for the merges but Finance Secretary Rajiv Kumar indicated that the ‘move was envisaged,’ meaning that it would happen sooner than later.

Indian Finance Minister Nirmala Sitharaman announcing bank mergers and bank reforms at a Press Conference in New Delhi last (Friday) evening (Picture from PIB Video)

Second largest PSB

Ms Sitharaman said that Punjab National Bank (PNB), Oriental Bank of Commerce and United Bank will be merged and become the second-largest Public Sector Bank after the State Bank of India.

“The merged entity will have a business of ₹17.95 lakh crore (1.5 times of PNB). It will have the second-largest branch network in India, with 11,437 branches. The Current and Saving Account (CASA) ratio of the amalgamated bank will be 40.52% and CET-1 would be 7.46%,” she said at a press conference in New Delhi.

“We have chosen these banks for mergers on the basis of ensuring that there is no disruption in the banking services. The banks that are being merged run the same or very similar platforms, and so there will be no disruption in their activities,” she said.

(Infographics Courtesy: The Hindu)

Other Mergers

Among the other mergers, Canara Bank and Syndicate Bank will be combined to form the fourth-largest PSB, with a business of ₹15.20 lakh crore. The Union Bank of India will be merged with Andhra Bank and Corporation Bank and the Indian Bank will be merged with Allahabad Bank.

In September 2018, the government announced its plan to merge three other State-run banks, namely Bank of Baroda, Dena Bank and Vijaya Bank.

Ms Sitharaman pledged that the mergers will not lead to any retrenchment of staff as was the case in the merger of Bank of Baroda (with Vijaya Bank and Dena Bank) last year. The employees received the best of the benefits and the administrative staff was redeployed for business, she said.

Risk Management and Administration

Ms Sitharaman said that the decision to merge the banks and create four major PSB entities is a part of the government’s move towards a US$ 5 trillion economy.

“This requires a larger economy and a robust banking system to handle the type of growth envisaged. The banking sector is an important aspect of that growth. There will be checks and balances in place, including special approvals and monitoring of loans that are ₹250 crore and above through Committees that will be responsible. The concept of Executive Chairman will be replaced by ‘Non-Executive Chairmen’ wherever required,” she said.

Ms Sitharaman said that about ₹55,00 crore capital would be infused into the banking sector to augment credit growth and regulatory compliance.

“We will also encourage recruitment of ‘Risk Managers’ from the open market to manage the risks with adequate powers. The government will not interfere with the management of banks. The boards will be empowered to manage the respective banks,” she said.

“The concept of regional banks will continue,” she said and gave examples of Indian Overseas Bank and UCO Banks in South India and Eastern States.

Performance Appraisal

The Hindu reported that in order to make the management accountable to the boards of the banks, a Board Committee would be made in charge of appraising the performance of officers of the rank of general managers and above, including the Managing Director. The banks have also been allowed to recruit chief risk officers from the market, at market-linked compensation to attract the best available talent.

“Other reform measures were aimed at increasing the engagement of non-official directors, allowing bank boards to reduce or rationalise the number of committees, and increasing the effectiveness of the directors on the Management Committees of Boards by increasing the length of their terms,” the publication said.

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