India announces series of mergers of state-run banks

India announces series of mergers of state-run banks

Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation's second-largest lender, Finance Minister Nirmala Sitharaman said at a briefing in New Delhi on Friday.

The merger of Allahabad Bank with Indian Bank will create the seventh largest public sector bank with Rs 8.08 lakh crore business with strong branch networks in the south, north and east of the country, she said, adding that Bank of India and Central Bank of India will continue to operate as before.

Finance Minister announced three more such mergers saying that the government "wants a strong financial system" to clear the path towards making India a $5-trillion economy.

The government's decision on four sets of mergers of public-sector banks (PSBs) will expand scale of operations, improve efficiency, and enhance competitive higher bargaining power, according to rating agencies and the industry.

Punjab National Bank will, post-merger, become the second-largest bank in the country, after State Bank of India.

While this amount is to be released upfront, she also announced additional lending and liquidity to the tune of Rs 5 lakh crore to PSBs.

In April this year, Dena Bank and Vijaya Bank were merged with Bank of Baroda.

However, merger-related issues including human resources and technology concerns, branch rationalization, and realigning non-performing assets may impact banks' interim profitability, she added. "There is a slowdown in the economy and private consumption and investments are down and at a time when you need to lift the economy and increase the credit flow in the short-term, you take a decision that will block the credit in the short term", said the official.

FM Nirmala Sitharaman also said that loan recoveries have hit record levels as it has gone up from Rs 77,000 crore in 2018 to Rs 1,71,676 crore.

Addressing a press conference, she said that the government recognised that consumption required a boost. The last statement is a hint at the bad loans crisis that the banking sector faces.

Specialised "Chief Risk Officers" will be appointed at PSBs at market-linked compensation to attract best available talent.

"Smaller state-owned banks are generally inefficient and so the idea to merge them to make a large bank would be a good one in the long run".

"Rs 55,250 crore upfront capital infusion will be made in PSU banks for credit growth and regulatory compliance to support the economy". Boards have also been given the mandate to reduce or rationalise board committees.

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