Thursday, September 12, 2019


With recent government announcement of merging 10 public sector banks into 4 banks in order to foster further banking reforms, total number of  state run banks  have been brought down from 27 (2017) to 12. Government clarified that this process will rationalize the demand on government finances for capital infusion.

An analysis of the data provided in the finance ministry’s presentation shows that the larger banks stand to benefit more in terms of capital adequacy than the smaller lenders, a sharp departure from the past, wherein the government infused capital in their balance sheets year after year.

Way back in 2016, through my blog “Consolidation of Banks- a noval suggestion”  (published in my  blogspot  &  in my website which was also published in “Business Standard” dated 09.03.2016 under the heading “Bifurcating Capital”;  I advised the Expert Committee on consolidation of public sector banks to ponder over the innovative structure of banks.

I cautioned the government that having 20, or in  its place, five nationalized banks would not serve the purpose if they do the same type of business, selling similar products and competing among themselves.

I advised that let there be specialized banks:-

a)      Large Banks for projects and infrastructure financing and having overseas presence;
b)      Small and medium enterprises (SME) Banks to meet the needs of the SME sector, thus aiding Make in India;
c)      Retail Banks that concentrate on the retail and priority sectors, tax collection and miscellaneous functions such as financial inclusion and subsidy distribution.
My suggestion was – let the consolidation be based upon the core strength of banks, existing and proposed, and their jurisdiction be clearly demarcated.
The government move is clearly in tune with my suggestion. Finance Minster Mrs Nirmala Sitharaman, in her presentation, has bifurcated the PSBs in three categories:-
1.      Banks with strong national & global reach;
a.      Punjab National Bank (+Oriental Bank of Commerce + United Bank of India)
b.      Canara Bank (+Syndicate Bank)
c.       Union Bank of India (+Andhra Bank + Corporation Bank)
d.      Indian Bank (+Allahabad Bank)
e.      State Bank of India (amalgamated earlier)
f.        Bank of Baroda (amalgamated earlier)

2.      Banks with national presence;
a.      Bank of India
b.      Central Bank of India
3.      Banks with regional focus;
a.      Indian Overseas Bank
b.      UCO Bank
c.       Bank of Maharashtra
d.      Punjab and Sind Bank

Exactly on the lines of my advice, government has divided the banks into  three categories  based upon   their core strength,  and   their jurisdiction is also clearly demarcated. Though in each category, number of banks are many, but with the passage of time, each category will have only one bank. Government should be one player in the market competing with the private sector. Public Sector Bank should be so strong as to compete with private banks. It’s not rational that PSBs keep on competing among themselves.

Regarding the clarification of the government that this process of consolidation will rationalize the demand on government finances for capital infusion, I had suggested in my said article (Business Standard dated 09.03.2016) as below:-

“The capital requirement of these banks should be stipulated. As the Large Banks would be competing with those around the world, their capital requirement should be according to Basel norms. SME Banks would mainly work within India, so their capital requirement could be less than that of the large banks. Retail Banks’ capital requirement would be the least, as their operations would be local, and they would have government guarantee.

“Instead of giving capital proportionately, let it be bifurcated into developmental capital and survival capital. The bigger chunk should be allotted as developmental capital and given to large banks and SME banks. Retail banks should be given only survival capital. This way the government would not have to shell out a large amount of funds and yet the social responsibility of public sector banks would be met”

Banking Quest