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Govt creates banking behemoths to spur flagging economy

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PSBs infused with Rs 3.19 lakh cr capital in last five years: FinMinNew Delhi, Aug 30 (IANS) In a sweeping bank reforms move, the government on Friday created PSU bank behemoths to spur the slowing growth which has now touched a six-year low of 5 per cent in Q1 of the current fiscal.

The government on Friday announced the mega-merger of 10 PSU banks into four entities, where the Punjab National Bank, the Oriental Bank of Commerce and the United Bank will merge to become the second-largest public sector bank (PSB) while the Canara Bank and the Syndicate Bank will amalgamate to set up the fourth-largest PSU banking entity. India will now have 12 state-run banks instead of 27.

The four new state lenders will have businesses worth Rs 55.8 trillion ($781 billion), or about 56 per cent of the Indian banking industry, Finance Minister Nirmala Sitharaman said at a briefing.

The government will inject a combined Rs 55,250 crore into these entities, she said.

Faced with global headwinds and slow demand at home, the government is looking at the larger and healthier banks to spur fresh credit and revive economic growth, which was far lower in the first quarter than the economists expected.

“Banks with strong national presence and global reach is what we want. Scaling up will only allow them to have lot more resources and therefore the lending cost can come down,” Sitharaman said at the briefing.

As per the announcement, Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second-largest lender with loans worth Rs 7.5 trillion, while Canara Bank will join Syndicate Bank with loans worth Rs 6.6 trillion.

Union Bank of India with Andhra Bank and Corporation Bank will have Rs 6.4 trillion, while Indian Bank with Allahabad Bank will generate Rs 3.5 trillion business.

The government will ensure that no bank employee is hurt by the decisions, Finance and Banking Secretary Rajiv Kumar said at the briefing.

He added that no one lost their job when the government helped facilitate the merger of Dena Bank and Vijaya Bank with Bank of Baroda last year, creating the third-largest bank by loans in the country.

Kumar tweeted after the announcement, “Clean & strong #PSBs for 5Trillion Economy. Reforms fundamentally rebooting #PSB functioning. Recurrence of past weaknesses now unlikely. Firm foundation laid for robust PSBs.”

The State Bank of India Chairman Rajnish Kumar said, “Today’s announcement on bank mergers is a cohesive and clear recognition that bigger banks have that much more ability to absorb shocks, reap economies of scale as well as the capacity to raise resources without depending unduly on the exchequer.

“Today’s announcement also underlines the fact that the government recognises the importance of a robust banking system in achieving the goal of $5 trillion economy as bigger banks will be better armed to meet the credit needs of a fast growing economy like ours. The decision to have separate mechanism for sanctioning and monitoring of big loans will ring-fence the banks against potential frauds.

“Further, the decision to empower bank boards and operational flexibility in hiring from the market will prioritise robust risk management practices in decision making.”

The Indian banking sector is weighed down by huge NPAs with bad loans piled up over the years receding through an insolvency framework.

A series of bank frauds have also hit the growth of the lenders and as the economy braces for a tough slowdown period, the government is looking up to the PSU banks to lend more for pushing demand, investment and consumption.

A bad loan clean up in the banking sector has contained credit to the companies and a crisis among shadow lenders is denying the consumers loans to buy goods such as cars. Moreover, unemployment too is at a 45-year high with companies refraining from making new investments.

“Bank consolidation is a good move by the government to improve the efficiency of the PSBs. The measures announced to improve corporate governance and groom leadership, if followed through with the right intent, resources and commitment, can go a long way in addressing the challenges that PSBs have been historically facing,” said Prakash Agarwal, Head, Financial Institution, at India Ratings and Research (Fitch Group).

The industry has also hailed the government’s move.

“Bank mergers and reforms show the government’s resolve to revive sentiment and growth. Mega mergers in public sector banks, reducing their number from 27 to 12 along with major governance reforms are a pointer towards the government fixing the banking sector issues with a resolve and purpose of taking India’s economy to $5 trillion by 2024,” said ASSOCHAM President B.K. Goenka.

Sanjoy Datta, Partner, Deloitte India, said, “The key to success would be to ensure rigour in execution of the mergers with specific emphasis on technology systems and human assets.”

Industry body FICCI said that PSU banks will now be able to play a more active role in driving economic growth.

FICCI President Sandip Somany said, “For an economy that is aiming to reach the $5 trillion mark, we need a very strong and stable banking sector that can efficiently meet the credit requirements. Today’s decision is a reflection of the government’s commitment to provide the country the financial base on which we can grow and move towards the $5 trillion mark.”

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