PSBs Merger issues

PSBs Merger issues

The Central Government merged Bank of Baroda, Vijaya Bank and Dena Bank stating it to be a concrete step in terms of strengthening lending capacity, cost efficiency and ease of operation, but the central government forgets to consider that most public sector banks have exposure to the same set of stressed assets and this latest move would eventually increase the concentration risk as the new entity would end up holding a larger exposure to stressed assets.

Key Challenges post amalgamation of further merger of public sector banks wef 1st April 2021 are as under:

  1. Firstly,the financial and process integration of consolidating entity would take considerable time to benefit from scale economies. Where Bank of Baroda had just enjoyed a highly visible point of customer recall and begun reaping benefits of its business strategy, it will again have to start from square one providing a common information technology platform, banking products, procedures and operational systems to implement a common system in the new entity thereby consuming much of the management attention and energy.
  2. Secondly,the issue of rationalising the branch network post-amalgamation will lead to a reduction in manpower, where over thousands of branch may need to be combined/ relocated, the biggest challenge meanwhile would be of providing valuable expertise to Human resource in enhancing skill levels of employees of erstwhile weak public sector banks, in the present deal-Dena Bank which so far had a regional focus with limited exposure. Since there is no uniformity in the technological front
  3. Thirdly,management bandwidth will be the key challenge for any restructuring entity as it lacks right people in sufficient numbers to effectively and efficiently manage operations. Additionally, the combined entity will require capital support from the government, to improve their capitalisation profile post-amalgamation to sustain and enhance fresh lending in future.
  • The Perception of the concept of “Too big to fail in Banking” creates an expectation of government to step in and support at times of distress.
  • Merging or Amalgamating PSBs is one of the most preferred rescue operations by the government to protect banks against losses as witnessed in the recent SBI merger.
  • An assessment of such instances of merger or amalgamation by the government signifies that such steps in no way helps sustain an individual banks identity as there is no progress in resolving current unconscionable level of Non-Performing Assets post PSB’s merger.
  • Such steps pose not to be an orderly and well thought out decision as the new amalgamated entity would end up hold a larger exposure to stressed assets.

Technology Issue:

  • Integrating two networks on different IT platforms into a common one is tougher than setting up a new bank from scratch.
  • This is even though the Government has chosen banks based on common IT platforms.

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