Bank merger announcement is a needless distraction Editorial 5th Sep’19 IndianExpress

Headline : Bank merger announcement is a needless distraction Editorial 5th Sep’19 IndianExpress

Details :

Public Sector Bank (PSB) merger:

  • In a major reform measure, the Union Finance Ministry has announced the merger of 10 public sector banks (PSBs) into four entities.

Seen as a response to slowdown:

  • The announcement comes in the wake of growth sinking to a six-year low, and was meant to be seen as a big bang response to arresting the slowdown.

Criticism of the move


In the short term, it will not help in improving the growth rates:

  • Some critics of the move say that the merger is actually a needless distraction.
  • In the short-term, the mergers will contribute nothing towards engineering a turnaround of the economy.
  • Divert banks’ attention from NPAs and Credit growth: Worse still, the administrative and logistic challenges of mergers will divert the mind space of bank managements away from their most pressing task at the moment — of managing the NPAs and aggressively looking for lending opportunities.
  • Divert resources away from actual banking: Also, at the lower levels, bank staff will be worrying about their jobs and career prospects while adapting to a new banking culture and new practices at a time when they should be giving their undivided attention to scouting for borrowers and improving service delivery.

In the long term, will the mergers be a net positive?

  • It is not unambiguously clear if the mergers will be a net positive in the long term. 
  • While mergers of banks motivated purely by business considerations lead to efficiency gains, it remains debatable whether the government forced bank mergers are a good thing .

Long-term benefits of mergers:

  • Cost efficiency: On the positive side, large banks will entail cost advantages by way of economies of scale such as centralised back office processing, elimination of branch overlap, savings in IT and other fixed costs etc.
  • Finance large projects: Large banks will also be able to finance large projects on their own even while staying within the prudential lending norms imposed by the regulator.

Shortcomings of mergers:

  • Creation of more banks too big to fail:
    • The biggest argument against big banks is that they can become too big to fail (this means government will be forced to bail them out in every crisis and it encourages irresponsible behaviour by big banks).
    • The financial sector is all inter-connected and a risk in any part of the system is a risk to the entire system. If a large bank were to fail, it could bring down the whole financial sector with it, as was evident from the collapse of Lehman Brothers in 2008, which triggered the global financial crisis. No country can therefore afford the failure of a big bank.
    • The proposed mergers will increase this “too big to fail risk”.

PSBs played an important role in independent India:

  • Banks were nationalised 50 years ago in a different era, in a different context.
  • PSBs rendered commendable service to the nation by deepening bank penetration into the hinterland and implementing a variety of anti-poverty programmes.
  • Financial intermediation by PSBs is one of the factors responsible for India moving from low income to a low middle income country.

But are Public Sector Banks needed anymore?

  • While acknowledging the contribution of PSBs, it needs to be asked if we still need PSBs.
  • Some experts say that the financial sector is wide enough and deep enough to take care of financial intermediation without the government at the steering wheel.
  • Meanwhile, the government could use its mind and time on more important things.

Way towards $5-trillion economy

  • There is wide consensus that today’s economic slowdown is due both to cyclical and structural factors.

Cyclical response:

  • By way of cyclical response, the RBI has cut rates and the government has announced a few measures like frontloading expenditures and cutting some taxes.
  • The RBI will probably cut rates further and the government will follow on with some more measures.
  • However, the most these can do is to lift the growth rate to its potential but that will not make us a $5-trillion economy.

Structural reforms:

  • We will become a $5-trillion economy not by growing at our current potential growth rate but by raising it.
  • That requires structural reforms.
  • Structural measures will take time to work their way through the system.
  • But even the announcement effect of structural reforms can have a big impact.
  • Taking PSBs out of government control:
    • For example, the government can put out a roadmap for giving up its majority stake in PSBs.
    • It will go a long way in shoring up sentiment and getting us off the block to a $5-trillion economy.


GS Paper III: Economics

Section : Editorial Analysis