PNB and Bank of Baroda to Merge with other smaller PSB’s

PNB and Bank of Baroda to Merge with other smaller PSB’s – What Mergers in Banking mean for the Banking Sector?

PNB and Bank of Baroda to Merge with other smaller PSB’s

The government is working towards a new overhaul for Public sector banks where they will merge several small sized public sector banks into larger banks that are smaller in number. The move is aimed at reducing the non performing assets of the banks and to raise fresh capital for the banks. The new move will consolidate a large number of small PSBs to a handful of banks that have more capital and that can lend more loans. The new move is after recommendations from the Prime ministers Office to declutter the banking space with few global size banks in place of too many small banks. This will also allow the banks to provide more loans and provide more facilities to its customers and still be able to cut costs.

The finance ministry is working closely with the RBI to address the issue of Non-performing assets and the new mergers are to be seen an antidote to this problem.

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3 Tier system to be introduced in the Banking Structure!

  1. The 1 Tier System will consolidate at least 3-4 banks of the size of SBI
  2. Tier 2 will constitute merger of banks like Andhra bank and Punjab and Sind bank
  3. 3 Tier system will have mid size lenders

Bank Merger in Indian Economy:

Banking mergers are often considered as a step towards development in the banking sector. Mergers often give fresh opportunities that help in resolving issues of NPA’s, more productive work force, help to change the hiring policy and raise fresh capital inflow from government from what is allocated for a merger. This only helps to reduce debt and make the new organization more powerful in a sense.

PNB and Bank of Baroda Merger:

Bank of Baroda and PNB shared rose more than 2.5 percent each with the news of the merger and consolidation coming. The new consolidation will see them taking over a lot of small lenders. The decision has not yet been materialized and is still under review as this is a new proposal from the PMO as part of the effort to reduce debt and NPA’s in banks.

Advantages of Merger in Public Sector Bank:

The consolidation of public sector banks will give more asset strength and increase the capital base of the bank. It also improves network and reach of a bank for the customers. If the market sentiment receives a merger of PSB’s well then it it only helps the stocks to perform well on the index.

Consolidation in the banking sector will help banks to manage their assets better.

However, consolidation of banks has also been met with lot of criticism from several quarters including receiving flak from employees, customers and shareholders. There is a general feeling that consolidation of banks will wipe out the individual identities of smaller banks when they merge to become larger banks. This was the case with the merger of the five sister concerns of state bank that consolidated to become State bank of India. There were mixed reactions to this merger from several quarters, however this has helped the banks function efficiently, but the legacy of the sister banks is gone for ever as they have consolidated under State Bank of India making it one of the largest financial conglomerates.

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Lets look at some other mergers in the banking sector:

Bank

Associate
Banks

State Bank
of India

State Bank
of Hyderabad

State Bank
of Patiala

State Bank
of Travancore

State Bank of
Bikaner & Jaipur

State Bank
of Mysore

Punjab
National
Bank

Oriental Bank
of Commerce

Allahabad Bank

Corporation
Bank

Indian Bank

Canara
Bank

Syndicate
Bank

Indian
Overseas
Bank

UCO Bank

Union
Bank
of India

Industrial
Development
Bank of India

Central Bank
of India

Dena Bank

Bank
of India

Andhra Bank

Vijaya
Bank

Bank of
Maharashtra

Bank
of Baroda

Union Bank
of India

Punjab & Sind
Bank

Mahila Bank


Advantage of Merger of Smaller Banks:

  1. Large banks can have more capital and offer more loans
  2. Efficient functions and more productivity
  3. No need for capital inflow to smaller individual banks from the government
  4. Customers will have more access to financial instruments and bank branches across the country
  5. Time and money gets saved, as interbank transactions will be reduced due to consolidation

Disadvantage of Merger of Smaller Banks:

  1. Local flavor and culture of the banks will be lost
  2. Large banks are exposed to a lot of financial risk
  3. Career growth of senior management is grossly affected
  4. May lead to rivalry among employees and infighting
  5. Might cause a lot of distress due to new organisational structure
  6. People will be attracted to private sector banks due to shuffle in management
  7. People might lose belief in Public sector banks due to above reasons

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Stay tuned for more updates on PSB Mergers!

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