RBI Governor Suggests Merging of Public Sector Banks

Public Sector Bank Merger is the burning topics in financial market of India. After successful merger of Associates bank and Bhartiya Mahila Bank with State Bank of India (SBI) , it’s time for some other banks to follow the footsteps. Earlier BBB head Vinod Rai already hinted that there would be merging of bigger bank. It is rumored that Punjab National Bank will merge Punjab & Sindh bank where as United Bank of India will go to Bank of Baroda. He suggested that Improved market valuations would create an opportune time for the government to divest some of the ownership in the restructured banks and this would reduce the overall amount that the government needs to inject into them to deal with the problem of NPAs and stressed assets.

Read : Government Hints Merging of Banks to Six

Recently in a seminar, RBI Governor Urjit Patel stated that

[box type=”info” align=”aligncenter” ]  It is a good sign that the weaker banks are losing market share. The stronger banks are gaining market share, which is a good thing, particularly the private sector banks. In a way it is working; those who need to shrink are shrinking. Indian banking system could be better off if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets. He said since there were cooperative banks and micro- financial institutions to provide community-level banking, “some banks can be merged, as a quid pro quo for timely government technical injection”.  [/box]

He insisted that there is no need of keeping many banks rather it could be better off if they are consolidated into fewer but healthier banks. He also advocated that public sector banks need to do is to raise private capital from the market and not rely on government at large. It is Public Sector Bank who will have to share the burden of Re capitalizing and not the government.

Read : Government Infuse Rs 22,915 Crore Capital in Public Sector Banks

The major point of concern is the large stressed Public Sector Bank balance sheets.  RBI governor said that in the instance of the insolvency and bankruptcy code, the Reserve Bank of India (RBI) has been preparing actively for the next step in an orderly resolution and this will be undertaken concomitantly with the resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action framework.

Merging will helpful for banking sector, especially for weaker bank as it is a good way to restore some market discipline and get the banks and their shareholders to more seriously care about management decisions. Consolidation of banks could also entail sale of real estate where branches are redundant as well as offering voluntary retirement schemes to manage headcount and adding younger, digital-savvy personnel.

Read : Top 6 Public Sector Bank After Merging

Other Statement Given By RBI Governor about Merging of Public Sector Bank

1. Lenders who are stronger are gaining more market share. I think there is a nice shift happening and we need to work with that to resolve this.
2.  Divestment in public sector banks would have a positive role for the sector. 
3.  Divestment measures would improve overall banking sector health
4.   The materialization of reforms in the form of roll out of the GST, the institution of Indian Insolvency and Bankruptcy Code and the abolition of the Foreign Investment Promotion Board (FIPB) should boost investor and investment confidence.