Economy

KEY POINTS

·        The government recently proposed the amalgamation of state-owned, Bank of Baroda (BoB), Dena Bank and Vijaya Bank.

·        It comes after the government let SBI’s associate banks merge with their parent last year and the LIC take over the troubled IDBI Bank this year.

Needs                                                      

·        It has been recognised for long that having several banks that are majority-owned by the government was not a sensible strategy.

·        It's because they virtually do the same business, and compete for the same set of customers.

·        It also meant a lower return on the capital employed by the government.

·        There are other factors as well to be taken into account, including -

1.      changing face of banking marked by technological changes

2.      challenges to raising capital that the owner (the government) has to provide periodically

3.      the need for consolidation in the sector

4.      putting an end to fragmentation

·        To address the humongous NPA problem of Indian banking sector.

·        It is also a part of India’s 4R strategy in banking sector (Recognise, Resolution, Recapitalisation, Reform)

Implications

·        Manpower rationalisation (loss of employment opportunities)

·        Impacts minority Shareholder interest (they are left with no say in the merger)

·        More consolidation will follow (as there are too many PSBs in India)

Merger as a solution

·        Asking healthy banks to take over weak banks appears to be the strategy to handle the bad loans crisis.

·        But they are less likely to solve the bad loan crisis.

·        Weaker banks would make an unhealthy impact on the operations of the stronger one.

·        The forced mergers of New Bank of India with Punjab National Bank and that of Global Trust Bank with Oriental Bank of Commerce show that they help neither the acquirer, nor the acquired.

·        The SBI merger is yet another example.

·        PSB boards suffer from poor governance standards.

·        Merely merging the laggards with those which are comparatively better off does nothing to change matters on the ground.

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Please review