BANK MERGER

New mergers include:

1. Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to
form the nation’s second-largest lender.
2. Canara Bank and Syndicate Bank will merge.
3. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank.
4. Indian Bank will merge with Allahabad Bank.

Why merger is good? – Benefits for various stakeholders:

For Banks:

1. Small banks can gear up to international standards with innovative products and services with
the accepted level of efficiency.
2. PSBs, which are geographically concentrated, can expand their coverage beyond their
outreach.
3. A better and optimum size of the organization would help PSBs offer more and more products
and services and help in integrated growth of the sector.
4. Consolidation also helps in improving the professional standards.
5. This will also end the unhealthy and intense competition going on even among public sector
banks as of now.
6. In the global market, the Indian banks will gain greater recognition and higher rating.
7. The volume of inter-bank transactions will come down, resulting in saving of considerable
time in clearing and reconciliation of accounts.
8. This will also reduce unnecessary interference by board members in day to day affairs of the
banks.
9. After mergers, bargaining strength of bank staff will become more and visible.
10. Bank staff may look forward to better wages and service conditions in future.
11. The wide disparities between the staff of various banks in their service conditions and
monetary benefits will narrow down.

For economy:

1. Reduction in the cost of doing business.

2. Technical inefficiency reduces.
 3. The size of each business entity after merger is expected to add strength to the Indian Banking
System in general and Public Sector Banks in particular.
4. After merger, Indian Banks can manage their liquidity – short term as well as long term –
position comfortably.
5. Synergy of operations and scale of economy in the new entity will result in savings and
higher profits.
6. A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting
in savings of crores of Rupee.
7. Customers will have access to fewer banks offering them wider range of products at a lower
cost.
8. Mergers can diversify risk management.

For government:

1. The burden on the central government to recapitalize the public sector banks again and again
will come down substantially.
2. This will also help in meeting more stringent norms under BASEL III, especially capital
adequacy ratio.
3. From regulatory perspective, monitoring and control of less number of banks will be easier
after mergers.

Concerns associated with merger:

1. Problems to adjust top leadership in institutions and the unions.

2. Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it
is not prudent and economical to keep so many banks concentrated in several pockets, notably
in urban and metropolitan centres.
3. Mergers will result in immediate job losses on account of large number of people taking VRS
on one side and slow down or stoppage of further recruitment on the other. This will worsen
the unemployment situation further and may create law and order problems and social
disturbances.
4. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area
of systems and processes too.
5. When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking
industry. Its repercussions will be felt everywhere.

Way ahead:

Merger is a good idea. However, this should be carried out with right banks for the right reasons.
Merger is also tricky given the huge challenges banks face, including the bad loan problem that has
plunged many public sector banks in an unprecedented crisis.
RECENT ECONOMIC SLOWDOWN
The country’s gross domestic product (GDP) in the April-June quarter of
this financial year grew at a meagre 5%—the lowest in six years. This is a
steep fall from the roughly 8% growth clocked in the same period about two
years ago.

Most glaringly, automobile sales in August declined by nearly 25% year-on-

year. The sector has seen large-scale retrenchments of workers, and major
auto manufacturers have declared “production holidays.” Besides, growth
in exports and imports have slowed down over the past five years and the
average annual industrial growth rate in the same period, as measured by
the Index of Industrial Production (IIP), is a dismal 3.5%.

Initially, the Modi government brushed aside these indicators, claiming

that “New India” is a private consumption-led story, with large-scale
employment being created in the gig economy, which is not adequately
captured in official figures. Yet, recent events like the layoffs at restaurant
aggregator Zomato, flies in the face of this official stance, and the
government can no longer remain in denial.

A country’s GDP is the money value of all goods and services produced in a
given year, net of intermediate inputs. The growth in GDP is usually
measured in “real” terms—or taking inflation into account.

For this, GDP at current prices is converted into constant prices, based on
prices in a particular “base-year.” Roughly every decade or so, the base-year
is moved forward to reflect changing economic structure, relative prices,
and better data sources, among other things. Usually, such periodic
revisions lead to a marginal expansion of “absolute GDP,” due to better
capturing of economic activity, but “GDP growth rates” do not change.

In 2015, as a routine matter, India’s central statistics office introduced a

revised GDP series with base-year 2011-12, replacing the earlier series
which had 2004-05 as the base year. This time, though, it was different.

The absolute GDP in the base-year (2011-12) contracted 2.3%, while annual
growth rates in the following years increased substantially. For 2013-14,
GDP by the new series grew at 6.8% compared with 4.2% in the old series.
The growth in manufacturing moved from -0.7% to +5.3%.
Such wild swings drew widespread suspicion, given that it was out of line
with other economic correlates such as bank credit growth, and industrial
capacity utilisation.

Two studies that have independently studied the official GDP numbers
support the contention of a possible overestimation.

Based on a cross-country econometric exercise, Arvind Subramanian,

India’s former chief economic advisor, concluded that the true average
annual GDP growth rate between 2011-12 and 2016-17 maybe 4.5%, against
the official estimate of 7%.

Sebastian Morris of IIM Ahmedabad (along with Tejshwi Kumari), in a

time-series econometric exercise using official quarterly GDP data, has
suggested that the average annual growth rate between 2012-13 and 2016-
17 maybe 5-5.5%, compared with the official estimate of over 7%.

With each passing day, new anomalies have come to light.

For instance, the November 2016 demonetisation of two key banknotes was
an economic disaster, according to evidence adduced by many scholars. It
destroyed output and jobs, particularly in the informal sector, which
accounts for between 45% and 50% of India’s GDP and up to 85% of
employment.

Yet, puzzlingly, GDP for 2016-17 grew at 8.2%—the highest in the decade!

India’s GDP may now be growing at a much slower rate than the official
5%—probably somewhere between 3% and 4.5%.

If 4% is taken as the more realistic number, then most of the Narendra

Modi government’s budgetary calculations would go haywire, as absolute
GDP size is the “universal” denominator in macroeconomics.

For instance, to attain Modi’s target of a $5 trillion economy by 2024, the

required annual growth rate would shoot up to over 10% from the official
requirement of 8%. Even attaining the official 7% growth, recorded during
the last five years, would be an uphill task as the recently-announced fiscal
stimulus and banking sector rejig would appear too modest.

Only an ambitious public investment programme can pull the economy out
of the rut.
In the early 2000s, when the economy was decelerating, the AB Vajpayee-
led government triggered a cycle of infrastructure-led growth by launching
the Golden Quadrilateral project to connect India’s metro cities by high-
quality roads and the PM Gram Sadak Yojana to connect all villages by
motorable roads.

Similarly, to address the much-discussed rural distress prevailing now,

India’s mammoth jobs programme, the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA), can be re-invigorated to revive
rural capital formation and employment generation.

The state, therefore, must steer investment growth, until the private
sector’s animal spirits are back.