1. PSU banks are laggards: Today the PSU banks still control over 70 per cent of the deposits and advances in the industry, but the entire pack mirrors each other in terms of performance. Take for example, the State Bank of India (SBI) has a balance sheet size of over 3.5 times larger than the sixth-largest HDFC Bank, but the largest bank in the country lags behind in terms of market valuation. HDFC Bank has a market capitalization of Rs 2.56 lakh crore as against SBI's Rs 1.41 lakh crore. In little over two decades, the new age banks like HDFC Bank and Axis Bank have emerged as the top 10 banks in the country, thereby leaving behind many of the banks with over 50 year old existence. In fact, RBI Governor Raghuram Rajan is himself against forcing a merger on banks. He had earlier gone on record that merging two weak banks or a weak bank with a strong bank (though we haven't had one) will create or make the merged entity unhealthy.
Today, SBI isn't in a position to merge any bank other than its subsidiaries and if one look at the remaining PSU pack, there isn't one big name, which can be called a strong bank. So we are essentially talking about merging two unhealthy banks.
2. Not the right time: This is not the right time for banks merger as the entire banking pack is facing challenges. The operating environment is wobbling, the corporate sector is over-leveraged, banks have bare minimum capital, the NPAs are skyrocketing and profitability is at the lowest level. There is a complete non-interest of investors in the PSU banks, with valuation of these banks dirt cheap in the market. So not the right time to kick-start mergers amongst banks.
3. Digital banking transforming the operating model: The entire banking is changing globally with app-only bank or branchless banking. In India, the new set of non-bank players like Paytm of the world are already threatening banks in the payments or transaction space. What is required today for PSU banks is the sea change in technology or digital banking adoption. Overtime, the new banking players with asset light models are expected to eat away their share. If you merge banks to create a larger entity, it would be all the more difficult for these banks to be nimble footed to face the competition.
4. The rural strength, not any more: The PSU banks have survived so long as they have a good presence in the rural and semi-urban market because of a strong brand and branch network. Now the entire rural banking model is itself changing with new Small Finance banks. Most of the microfinance institutions have secured the new licenses and they are expected to play a big role in financial inclusion.
5. Merger Pangs: The merger challenges are going to be huge. Do they have experience in dealing with people and cultural issues or merging products etc? In the past, even many private sector banks have struggled in such mergers. The HR being the top most concern as salary, seniority, postings etc will create a big challenge. Similarly, the banks use different technology. This itself would be a humongous task.
6. Danger to financial stability: Given the track record of PSUs, the new entities, say 5 or 6 large banks, could be a danger to financial stability. Any bank failure would create multiple problems for the system as well as for the economy.