Modi govt’s mega PSU bank mergers to improve efficiency, credit quality; what analysts say

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Published: August 31, 2019 9:50:26 AM

After the Narendra Modi-led government announced a mega PSU bank merger in a bid to create national banks with with global presence, analysts say that the move will help to improve efficiency of the banks and spur up the economy.

Union Finance Minister Nirmala Sitharaman, nirmala sitharaman, bjp, tax, economyUnion Finance Minister Nirmala Sitharaman

After the Narendra Modi-led government announced a mega PSU bank merger in a bid to create national banks with with global presence, analysts say that the move will help to improve efficiency of the banks and spur up the economy. The bank consolidation announced by FM is likely to bring in more synergies among players in the PSB sector after having addressed operational issues and infused more accountability at all levels, says Ravikant Bhat, Research Analyst, Banking at India Nivesh Securities.

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“The bringing together of banks based on their strengths and operational metrics including geographical significance and spread should ensure a smoother consolidation. The simultaneous plan of disbursing Rs 70,000 crore among the merging entities should ensure a healthy post-merger capitalisation,” he added. 

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Yesterday, FM Nirmala Sitharaman announced mega PSU bank mergers merging PNB, OBC, United Bank to create India’s second largest govt bank in a bid to realise Modi’s $5 trillion economy dream. Further, 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.

According to  Mona Khetan, Banking Analyst, Reliance Securities, a key consideration for the merger has been technological inoperability within the merged banks. The consolidation will aid economies of scale for these banks, resulting in improved cost of funds and operating efficiency. “Nonetheless, merger related issues including HR/IT related synchronization, branch rationalization, and realigning of NPAs could impact interim profitability,” he added.

Rajiv Singh, CEO, Karvy Stock Broking noted that diligence in selection of entities, regional inclusion, usage of technological platform, NPA’s and allocation of funds to these merged entities will make sure of availability of liquidity in the system. “Encouragement of individual development plan will ensure smooth transition and succession plans for these merged entities which will also ensure proper functioning of these banks. She has commented that after Asset Quality review framework from RBI loan recoveries have improved over last one year which will help bring down NPAs,” he added.

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