Core Problems Remain

The government has merged 10 public sector banks (PSBs) into four entities; decided to strengthen the national presence of two; and form four regional focussed banks. Together with the merger of SBI with associate banks and the three-way merger of Bank of Baroda-Vijaya Bank-Dena Bank, there will be a dozen large, national and regional banks to help achieve the government's aim to be a $5 trillion economy. The merger move is recognition of the fact that bigger banks have greater ability to absorb shock, reap economies of scale and raise resources without depending on the exchequer, says SBI Chief Rajnish Kumar.

The three broad gains from the consolidation will be an increased capacity to lend; stronger national presence and global reach; and operational efficiency that will lead to lower cost of lending. But size alone won't guarantee results. India's largest bank, SBI, doesn't figure in the top quartile in terms of performance. Merging Punjab National Bank with two weak banks, United Bank of India and Oriental Bank of Commerce, will eventually weaken the stronger entity.

The PSB model of banking with government ownership, control and lending support to government's agenda (priority sector, financial inclusion, Mudra etc) has been a big stumbling block for bringing change in their functioning. The merger doesn't address the core structural and fundamental issues plaguing PSBs.