The merger of public sector banks (PSBs) is once again on the government's agenda. Minister of State for Finance Shiv Pratap Shukla recently said that the government has asked the Reserve Bank of India (RBI) to suggest possible combination of PSB mergers. Here are four approaches to get the best results.
Merger Based on Geography
PSBs are spread across the country with some focusing on a specific geography. For example, Corporation Bank and Canara Bank are known for a better network in the South while Punjab National Bank is more prominent in the North. Merger of banks based on geography will result in lesser disruption in terms of rationalisation of branches and people.
Merger of Weak Banks
Almost half of the PSBs are languishing at the bottom in terms of financial performance. In fact, close to a dozen are under the RBI's prompt corrective action (PCA) framework. These banks have seen a massive erosion in their capital levels, net worth and deterioration of asset quality. The merger of weak banks can be done once the bad assets are out of the system. This will also help in having one or two large entities with better governance and a professional management to make a new start.
Merger to Create Niche Banks
In a new emerging banking model, there are already niche players like payment banks (retail payments), Small Finance Banks (doing micro loans ), full scale banks ( Axis or an HDFC Bank) and universal banks (ICICI Bank or a Kotak Bank). There is a space for creating certain niche entities like an SME focused bank or an MSME focused bank. This can be achieved by merging few PSBS with a new mandate to cover a particular sector.
Merger to create large banks
There is a view that the government should strengthen the hands of banks like Bank of Baroda to create few four-five large banks. SBI has recently merged five of its associates to create a much larger entity in the market. It is high time the government should look at creating a few large banks with at least Rs 10-15 lakh crore of balance sheet size.