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PSU Bank merger: Good or bad? A mixed bag of long-term positives and short-term hurdles

PSU Bank merger: Good or bad? A mixed bag of long-term positives and short-term hurdles

New Delhi: The recent proposal of the government to merge the 10 public sector banks into 4 larger entities has received a mixed bag response from the investors, economists, experts, and other market players. A debate has spurred around government’s move of consolidating weaker PSU banks with other PSBs.

Going ahead, on a long stretch, the mega consolidation of public sector banks (PSBs) is likely to help the government-run lenders to improve operational efficiency and profitability margins. However, the banks which are supposed to merge their respective worldwide operations may face several glitches and hurdles in the near term following the mass integration.

Big balance sheets, decreased costs, improved market capitalisation are some of the positives with regard to the mega-bank consolidation process of 10 banks. A number of experts have red-flagged several concerns such as possibilities of tepid growth in the present fiscal, complications in the integration of thousands of bank branches.

Bank unions have strongly condemned the government’s decision to merge 10 banks into four as it will increase layoffs and reduction of workforce in the banking system. Union Finance Minister has purportedly said that there will not be a single-job loss due to bank mergers. If there are no layoffs amid the banks merging together, then how will the bank merger justify the concept of improved efficiencies and synergies among the banks.

Though, the narrative around the recent amalgamation of public sector banks will develop with time as the proposal passes through various regulatory approvals such as Competition Commission of India (CCI), Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI). The government’s capital infusion plan in the weaker PSU banks is likely to catalyse the merger process along with the banks’ own ability to raise capital.

Bank merger: Experts' take

  • “We believe that the consolidation activity would be positive for PSBs in the long term as it will make them more competitive and enable them to withstand increasing competition from private banks that have been gaining size steadily. However, the merger process will present its own set of challenges in the near term related to credit growth, integration issues, etc,” Motilal Oswal Financial Services said
  • “The government has wisely kept few PSBs untouched while giving them growth capital, which should help meet the economy’s credit requirement while the consolidation activity is underway. We retain our PT and ratings on other PSBs and await clarity on swap ratios and potential asset quality cleansing that may happen prior to the merger taking effect,” the brokerage added.
  • ”PSBs merger will lead to improving operational efficiency, creating larger entities and other important tenets like improving governance, accountability and sharper monitoring. Consolidation will also help lower capital infusion from GOI going ahead as smaller PSBs had much lower chances of raising capital on their own and GOI shareholding was getting concentrated. Now with larger PSBs stigma of capital raise can be eliminated as performances improve,” Prabhudas Lilladher said in a report.
  • “The consolidation is a long-term structural reform, which should result in commercially viable entities with better economies of scale, including lower cost of funds and operating efficiencies over time,” Reliance Securities said in a research note.
  • “Nonetheless, merger-related issues including HR/IT synchronisation, streamlining of processes and realigning the NPAs will have adverse impact on profitability in the near-term, as focus shifts from growth/NPA resolution to amalgamation. However, from the government’s perspective, fewer PSBs should aid easier administration and lower capital requirements, going forward,” the brokerage said further.

The government has proposed to merge Oriental Bank of Commerce and United Bank of India will be merged with Punjab National Bank (anchor bank) to form the second-largest PSU banking entity. Canara Bank and Syndicate Bank will be merged to form the fourth-largest PSU banking entity. Andhra Bank and Corporation Bank will be integrated with Union Bank of India to become the fifth-largest PSU banking unit. Indian Bank will be consolidated with Allahabad Bank to form the seventh-largest public sector bank.

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