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Banks Merger and Branches Closure: Do Public Sector Banks Face the Threat of Privatisation?

The surge in Indian bank mergers and branch closures prompts debate over a shift from nationalisation to privatisation. Economists and Bank Unions contest merger efficacy, highlighting performance issues and questioning the government's motives.

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Author: Saurav Kumar

Published: October 4, 2023

The banking sector in India in the recent past has witnessed a spree of merger and closure of bank branches. This raises questions on the turn away from bank nationalisation of 1969 towards privatisation.

Merger of Public Sector Banks
Merger is an agreement between entities where they pool in their assets and liabilities and become one entity. The merger of Public Sector Banks (PSBs) is where the PSBs are merged with 'anchor' banks.

The Modi Government merged 10 nationalised banks into four large lenders, bringing down the number of PSBs i.e. 27 in 2017 to 12 in 2019. 

One of the prime reasons entailed was to boost the economy. 

The government also said that amalgamation was done to improve cost efficiency, risk management, and also boost the goal of financial inclusion through wider reach.

The biggest merger in the banking sector in recent times was of five associate banks of the State Bank of India (SBI) in 2017. 

Its associate banks namely State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Hyderabad, State Bank of Patiala and State Bank of Travancore along with Bhartiya Mahila Bank were merged into the SBI. 

The merger streak continued further and banks merged in 2019 were the United Bank of India and Oriental Bank of Commerce was merged with Punjab National Bank; Syndicate Bank was amalgamated with Canara Bank; Allahabad Bank was amalgamated with Indian Bank; and Andhra Bank and Corporation Bank was consolidated with Union Bank of India.

Counter Arguments of Merger
Despite the decision of merger being enforced, it is being contested by economists who authored an experimental paper on Stochastic Frontier Approach (SFA) in the Economic and Political Weekly titled: Bank Merger, Credit Growth and the Great Slowdown in India. 

The paper said: The basis of the recent spate of mergers is not clear. On many occasions, poor performing banks were merged with a better performing one. For example, Oriental Bank of Commerce (OBC), despite falling cost efficiency from 95% to 86%, was merged with Punjab National Bank (PNB). “The merger of the OBC with Punjab National Bank in 2020 makes very little economic sense”, argued the authors. 

Likewise, the associate banks that got merged with the SBI incurred a cumulative loss of Rs. 5905 crore in the first nine months of the financial year of 2017. And subsequently it led to SBI’s profit nosedived from Rs. 12,225 crore in FY 16 to Rs. 241 crore in FY 17. 

The paper concluded that, “The merger exercise in India is a special one. Instead of denationalisation, it promotes further nationalisation. In particular, when the merger involves a PSB, it is always pro-nationalisation. A private bank (in most cases a failing bank) is merged with a public bank, but not vice versa.”

In addition, there are established results that prove bank mergers are not likely to generate efficiency. 

On July 19, 1969, the Government of India nationalised 14 banks and the second round of nationalisation included six more banks in 1980, aiming for larger inclusion of people into the banking sector. 

However, trade unions in the banking sector have been sceptical about the conspicuous efforts of privatisation through merger. 

Sanil Babu, Bank Employees Federation of India (BEFI) Kerala state secretary told Kanal, “Merger of state run banks is a step in the direction of privatisation. But due to the resistance of trade unions, the government is unable to push a big-ticket privatisation.”

“But the nationalisation policy seems to be waning. Besides merger of PSBs, decline of credits and workforce employed in the government banks are also bad signs” added Sanil Babu.

Dwindling Credits
The Public Sector Banks in the last decade have seen drastic events indicating their losing grip in the banking sector and the recent data reveals it. 

The share of total outstanding bank credit of PSBs as of March 2022 came down to 54% as compared with 65.8% five years ago and 74.2% 10 years ago.

In the same period, the share of private sector banks nearly doubled to 36.9%.

Declining Workforce
The most shocking numbers that reflect a worrisome decline of the banking employees was the 2022 annual RBI report on Statistical Table No.12 relating to Banks for 2021-22 that contained information on bank-wise and category-wise employees of Scheduled Commercial Banks (SCBs) in the country.

The table shows the total number of PSB bank employees stood at 770,000 in 2021-22 which was the highest at 857,000 in 2016-17 after which it has declined every year. 

On the contrary, the total number of employees in SCBs has increased to 1.57 million from 1.3 million during this period private sector banks add the bulk of the increase witnessing an increase from 400,000 to 650,000 during this period. 

Moreover, as per a recent RTI report, 4,837 branches of several public sector banks have been closed in the past two financial years. These include - Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, Indian Overseas Bank, Punjab and Sind Bank, Punjab National Bank, State Bank of India, UCO Bank, Union Bank of India. 

Similar trend was seen in India’s largest public sector banks. In 2022, the recruitment of employees in banks decreased. For instance, the clerical posts in Regional Rural Banks (RRBs) dropped to 4567 from 6898 in 2021. 

The SBI has also scaled down its hiring.

Tags:befimergerprivatisationpublic sector banksstate bank of indiaemployees federationbank