Oracle IAS, the best coaching institute for UPSC/IAS/PCS preparation in Dehradun (Uttarakhand), brings to you views on important issues.
Syllabus: GS-3–> Indian Economy
'Bank consolidation is a necessary step to curb the rising NPA issue but not sufficient'. Comment.
First read: Problem of rising NPA
Why in news?
- The government recently proposed the amalgamation of state-owned Bank of Baroda (BoB), Dena Bank and Vijaya Bank.
How did the idea take shape?
- A committee headed by former RBI Governor M Narasimham was appointed in 1991.
- It is more than 27 years since it had recommended a restructuring of Indian banks.
- It made the first call for pruning the number of government-owned banks which was over two dozen.
- It recommended having three or four large banks including State Bank of India that could be positioned as global banks.
- Besides, there can be eight to ten with a national footprint or presence.
- In 2016, the government decided to pursue consolidation after first pumping in more capital.
- This is to put back on track many banks weighed down by a huge pile of bad loans.
- To facilitate this, the government last year put in place an Alternative Mechanismon bank mergers.
- By this, an inter-ministerial panel was to be set up to supervise merger proposals and approve them.
- The first such proposal is the recent Bank of Baroda (BoB), Dena Bank and Vijaya Bank consolidation.
Why the amalgamation?
- It has been recognized 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 –
- Changing face of banking marked by technological changes
- Challenges to raising capital that the owner (the government) has to provide periodically
- The need for consolidation in the sector
- Putting an end to fragmentation
- The government is also emboldened by the experience of the merger of five subsidiaries of the State Bank of India last year.
How is it going to benefit?
- The amalgamation will create India’s third-largest bank.
- It would take form as a business of Rs 14.82 lakh crore and over 9,600 branches across the country.
- Mergers are often advocated on the basis of synergies.
- These could be in terms of operational efficiency with a large pool of staff in a merged entity.
- It could help boost business, expand reach and offer more services or products.
- On a standalone basis, Vijaya Bank had strength in the South.
- On the other hand, Bank of Baroda and Dena Bank had a stronger base in Western India.
- This would mean wider access for both the proposed new entity and its customers.
- Besides, the move will lead to a lower NPA (non-performing assets) ratio for the new bank.
- The NPA ratios are now 11.04% for Dena Bank, 5.4% for Bank of Baroda and 4.1% for Vijaya Bank.
- This could, in turn, mean lower capital requirements from the government.
- The new bank, with its higher capital base (12.25 %) can have better ability to lend more.
What are the issues?
- The boards of all three banks, being public listed entities, will meet soon and try and get approval for the government proposal.
- This will not be a challenge as the government has the dominant shareholding in all the three.
- The real challenge is the integration in a new entity, whether in operations or culture.
- It helps that the three banks chosen have a common technology platform.
- This may make it work like in the case of the SBI and its subsidiaries.
- However, human resources can often be a challenge with contrasting HR practices.
- Also, aligning these with employee expectations or aspirations will also test the new management.
- The other major test will be leadership i.e. choosing one of the CEOs to head the new bank and with a reasonable tenure.
- Besides, addressing the concerns of unions and shareholders will be another significant task.
Contact us for:-