Bank Merger

The Finance Minister, Nirmala Sitharaman has announced the merger of public sector undertaking (PSU) banks. This move will bring down the number of public sector banks from 27 in 2017 to 12 after merger.

Six Mega PSU banks created as a result of the merger announced on August 31. Image: Bloomberg Quint

As a former banker, I support this move. Existence of multiple public sector banks has been an enigma for me. These banks existed once as private sector banks. They competed then and played a role in the Indian economy. Their nationalisation in 1979 made them all public sector undertakings. Having banks in every nook and corner of the country was one of the reasons cited behind bank nationalisation. The idea was to make banking accessible to the poor and financial inclusion. As it was said then, to change from class banking to mass banking.

However, this still does not seem to have been achieved. Payments bank have been started up to achieve the same goals. However, these end up serving the same urban populace as private banks in India where the money is. All this achieved was make competition in urban areas, where the money is, more stiff.

Private banks and payment banks are able to provide better service and better loan recovery because of the targeted nature of their banking. They work in areas where they have competence and knowledge.

Success in universal banking cannot be measured with the yardsticks used for class banking of the private banks. Universal banking is by its nature very intensive, involves high wastage and is highly inefficient.

The merger of these public sector banks makes more staff available to them. These can be deployed in rural centres to meet the shortfall of staff branches face whilst in urban centres to meet the shortfall of loan processing and servicing staff.

It would take at least a generation before enough private banks spring up to target various parts of universal banking. Some will still not be viable. As various government policies push towards formalising the economy, many of these private banks will merge to form larger banks.

As for public sector banks, ultimately, I hope that there is only one public sector bank. Perhaps, two. State Bank of India will definitely be one of them. Union Bank has a nice ring to the name if there needs to be another bank which is a union of all other banks other than State Bank. Eventually, I hope everything is merged into the State Bank. In the meanwhile, processes need to be streamlined, documentation needs to be standardised and loans need to be recovered.

Will there ever be a time when India will not have a need to have any public sector bank?