Explained: What bank mergers can mean, the potential downsides

2 min read
  1. Recently,the Government has announced a merger of ten public sector banks(PSBs) into four larger entities.This would take the number of banks in the country from 27 in 2017 to 12.
  2. The idea of bank mergers had floated since 1998 when the second Narasimham Committee had recommended the government to merge banks.
  3. In 2014, PJ Nayak Committee had also suggested that government should either merge or privatize state-owned banks.
  4. The merger of banks is needed as it will help in (a)strengthening the PSBs presence globally, nationally and regionally (b)will improve the professional standards of PSBs (c)It will diversify risk management (d)Bigger banks with diverse portfolios have lesser chances of failure and (e)merger will also lead to operational efficiency gains which will reduce their cost of lending.
  5. However,there are various concerns associated with merger such as (a) difficulty in adapting to new emerging culture (b)Mergers will result in shifting/closure of many ATMs (c)deterioration of services and disruption in the near term and (d)fewer options for customers.
  6. Hence,merger is a good idea.However,Public sector banks should not be merged mindlessly to create a few bigger banks.Prudent selection of banks based on market forces is the need.