Big Bang Change! Modi govt announces bank-merger scheme; PNB, Oriental Bank and United Bank to be first to merge

In one of the biggest moves yet in the banking sector, Union Finance Minister Nirmala Sitharaman announced the merger of public sector banks (PSBs) today to consolidate the banking sector. The first merger includes Punjab National Bank, Oriental Bank of Commerce and United Bank with capuital of Rs 17.95 lakh crore with PNB as the anchor bank. 

The second consolidation will comprise Canara Bank with Syndicate Bank with capital Rs 15.2 lakh crore. This will be the 4th largest consolidation. 

The third largest network will have Union Bank of India, Andhra Bank and Corporation Bank as the 5th largest with a capital of Rs 14.9 lakh crore 

The fourth network will have Indian Bank with Allahabad Bank with a capital of Rs 8.08 lakh crore 

Sitharaman said that this consolidation of banks will have 82% business, rest will be with others. 

According to the finance minister, till 2012, there were 27 public sector banks, but now 12 consolidated banks will operate to provide necessary banking support.  

She said that out of 18 PSBs, 14 banks are in profit earning situation.

She also informed that in consolidation of three banks including Bank of Baroda, Vijya Bank and Dena Bank, the rationalisation of operations was achieved and emphasised that there was no retrenchment of any staff, rather they were deployed for business purposes.

She added that 20.5% increase in retail loan growth has been witnessed at Rs 1.12 lakh crore, showing enhanced profitability through consolidation.

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Earlier, she said that loans recovery records have been created and gross NPAs have also come down. It now stands at Rs 7.90 lakh crore. 

On the raitionale behind the merger, Finance Secretary Rajeev Kumar said "There should not be any disruption to the customers, and hence we are ensuring that the banks which are merging that they operate on the same techonological platform," "Rs 70,000 crore bank recapitalisaiton are yet to go through the assessment from the Public Sector Banks' boards."

Deepak Jasani, Head of Retail Research, HDFC Securities, in a note said, "The announcement of PSU Bank consolidation is welcome and a good first step in sustainably turning around the PSU Banks. Although this step was long awaited, the recent experiences in SBI and Bank of Baroda episodes have given some comfort to the Govt to go ahead now with the process for the rest of the Banks. The Govt has accelerated the pace of reform announcements  over the past few weeks  pushed by the slowdown in the economy and emboldened by the recent RBI fund transfer."

Looking forward, he added, "Capital adequacy and consolidation were the two pressing requirements of PSU banks. However more work needs to be done on changing the compensation structure, work culture and governance with tough calls needed to be taken to ensure availing the cost rationalisation/reductions and operational efficiencies/synergies assumed for the consolidation. While the usefulness of common technology platform as a starting point for consolidation cannot be disputed with, more work will be required to bridge  geographical gaps / close overlapping branches and overcome cultural differences. All these will help PSU banks to compete effectively against the Private Banks and SFBs in creating a robust profitable credit book and building up fee businesses."

Other key highlights:

1. Consolidation has enhanced profitability. Of total 18 PSBs, 6 showed profitability in Q4FY19. Now 14 are profitable in Q1FY19.

2. Early signal warning system is being implemented for every loan which is over Rs 250 crore. 

3. 3.38 lakh shell companies have been closed. The resolutions for stressed assets are happening through the IBC. Consortiums of banks which can fund projects are now limited to 7 to 9 banks, according to the FM.

4. PSB boards will have the flexibility to introduce CGM. The PSBs will now appoint a Chief Risk Officer, who will be provided market-level compensation. 

5. To improve governance, Bank boards will have flexibility to enhance sitting fees of Non-official directors.