Mega PSU bank merger: PNB, OBC, United Bank to be merged into India’s second largest NextGen govt bank

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Updated: August 30, 2019 5:29:09 PM

Finance Minister Nirmala Sitharaman announced a mega PSU bank merger on Friday, merging PNB, OBC, United Bank to create India's second largest govt bank in a bid to realise Modi's $5 trillion economy dream.

Union Finance Minister Nirmala Sitharaman, nirmala sitharamanUnion Finance Minister Nirmala Sitharaman (ANI)

Finance Minister Nirmala Sitharaman announced mega PSU bank mergers on Friday, merging PNB, OBC, United Bank to create India’s second largest govt bank in a bid to realise Modi’s $5 trillion economy dream. Not only this, the government has decided to amalgamate seven other PSU banks into three big lenders. Nirmala Sitharaman said that Union Bank, Andhra Bank and Corporation Bank will be merged to create India’s 5th largest PSU bank entity, while Canara Bank will be merged with Syndicate Bank to form 4th largest government bank. Finally, Indian Bank will be merged with Allahabad Bank to form the 7th largest state-run bank in India.

Terming these as “Nextgen PSBs,” Nirmala Sutharaman said that the consolidation of the public sector banks is being done to achieve national presence and global reach. Together, these consolidated banks, which include SBI and amalgamated banks as well as BoB, will form 82% of the total PSB business and 56% of the commercial banking business.

The move comes shortly after FM Sitharaman had announced a slew of reforms in this month, including a Rs 70,000 crore ‘upfront’ capital infusion in the PSU sector. Earlier, five associate banks and Bharatiya Mahila Bank were merged with State Bank of India under Modi 1.0 regime. Further, Dena Bank and Vijaya Bank were merged with Bank of Baroda effective April 1, 2019.

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Sharing the benefits of consolidation of Bank of Baroda and Vijaya Bank, Sitharaman said that significant synergies were realised, and there were no retrenchments, and the bank had better credit quality, strong retail loan growth.   The government has resorted to consolidation in the PSU space to make these banks competitive and financially string players in the banking space. “I think India needs fewer and mega banks which are strong because in every sense, from borrowing rates to optimum utilisation, the economies of scale as far as the banking sector is concerned are of great help,” Arun Jaitley had said in February this year. In a recent report, the RBI had recommended further consolidation in the banking sector to achieve labour cost efficiency.

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RBI said that larger banks are labour cost efficient relative to their smaller counterparts as the former can reap the benefits of economies of scale. “This finding provides an additional rationale for recent mergers of banks, both amongst PSBs and PVBs (Private Banks) and suggests that further avenues of consolidation in the banking sphere may be explored,” RBI said in its report.

In May this year, global news agency Reuters had reported that Modi 2.0 may look to merge government run Punjab National Bank with two other PSU banks including Oriental Bank of Commerce, Andhra Bank and Allahabad Bank after the elections. The government plans to do such to limit the number of state run banks to 5-6 in the country, the report added.

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