Are bank mergers in India good for the economy?

There have been multiple bank mergers in India in the past few months and many more are in the pipeline. In a race to create Systemically Important Banks in India and tackle the burdening non-performing assets, mergers have been planned between equal players. But before we come to a conclusion, we must weigh how much the benefits of this step outweigh the cost.

A pressing issue and a topic of debate, it might appear as a group discussion topic during your admission or placement interviews. Let’s have a look at the bigger picture and dissect the current status.

Advantages

Let us first begin with an in-depth analysis of the advantages that these bank mergers bring to India and its economy.

As the banking system goes to following global guidelines of Basel III Norms, such mergers will enable banks to be able to face competition. As of now, no Indian bank counts in the list of G-SIBs (Globally Systemically Important Banks).
Consolidation of banks will consequently form a few strong banks to form a pillar of the economy.
With increasing stress in the banking sector from NPAs, small banks and NBFCs are not in the potential to lend more loans. Post-merger, big banks can better deal with non-performing assets and may not have to stop giving more loans.
With multiple banks opening in some regions, there is some inefficiency in the economy in terms of the duplicity of work and physical capital. It can be combated with mergers, thereby, creating economies of scale in operations.
Monetarists believe that in the long run, the merger of banks will be highly beneficial. In terms of investment flows, investor confidence for strong banks is likely to be higher than that of weak ones. The paucity of investments is a current issue faced by medium and weak banks. Strong banks have the bandwidth to attract investments.

Disadvantages

Now that we have looked at one side of the coin, let us take a glimpse of the other side and understand how disadvantageous these bank mergers are in India.

Unlike SBI merger, PSU banks merger is a more problematic issue owing to heterogeneity in terms of the policy and regulations of each bank.
- Merging different types of banks can potentially flame present problems.
The consequences of big banks failure are enough to blow the country’s economy, thereby making it a risky proposition.
While the main agenda of bank mergers turn out to be the ever-growing problem of Non Performing Assets, mergers might not solve the problem.
- NPAs are stocked up due to inefficient policies with NPAs and regulatory forbearance. Hence, mergers will not solve the problem of NPAs.
For any successful merger, synergy turns out to be a really important factor. However, in the current scenario, there will be problems with synchronization.
- For instance, post-SBI merger, SBI didn’t extend the benefits available to employees in SBI branches to its associate banks.
Banking is still not deeply included in Indian saving culture. Regional Banks created a level of trust in people which will be gone with mergers.
- The impact of mergers on customers is often quite emotional. If the customer perception is not managed with sensitivity, it can potentially lead to loss of business.
As India races to form G-SIBs, there is no guarantee that the newly formed banks will have the potential to compete in the global race.

Concluding remarks

Whether mergers have the potential to create a positive impact or not is largely dependent on political, economic, social and technological architecture factors. The actions taken with respect to bank mergers in India are taken with good intentions. Whether or not its benefits outweigh pain points, is for the time to decide.