Merger of govt-owned lenders weakening banking system, says study

A study has found that the consolidation of public sector banks cannot be explained on efficiency grounds and that the merger of these banks was actually weakening the banking system.

The Economic and Political Weekly said in a May 14 article that the merger decisions were not necessarily on efficiency grounds.

The results show that there is no evidence that mergers improve cost efficiency. In most cases, merger leads to worse performance of the good bank and weakens the banking system further, according to the article.

The article is titled "Bank Merger, Credit Growth, and the Great Slowdown in India". While Das teaches economics at the Indian Institute of Management-Ahmedabad, Kumbhakar teaches at the State University of New York.

The duo used a method called SFA to find little economic basis for the PSB mergers that have taken place in recent years.

The consolidation of PSBs with effect from April 1, 2020 was approved by the Union cabinet on March 4, 2020. The Oriental Bank of Commerce, United Bank of India, Punjab National Bank, Syndicate Bank, Canara Bank, and Union Bank of India were merged.

The cabinet approved the unification of the banks in January. The cabinet approved the acquisition of five subsidiary banks by the State Bank of India.

The larger entities would lend themselves to greater competitiveness in India and globally.

The study found little support for the claims.

The basis of the recent mergers is not clear. Poor performing banks were merged with better performing banks. The article said that the associates of the State Bank of India had registered losses before merging them with the bank.

The authors looked at the performance of the two merged banks and checked it prior to the merger. The study found that the efficiency of the bank had fallen.

Over the four-year period, its cost inefficiency had increased by a little more than 30 percent, suggesting that the bank should have been restructured earlier.

Bad management, ownership, government regulations, and policies regarding bad loans are some of the factors that can cause inefficiency.

The analysis found that it was doing well until 2011. Its efficiency went from 95 percent to 86 percent before it recovered to 92 percent in 2020.

The authors argued that the merger of the two banks in 2020 makes little economic sense unless one argues that PNB will be able to pull in more business after the merger.

There were several examples of the decline in efficiency after the merger of Punjab National Bank.

The article said the study would be published as a working paper.

"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," the article concluded.

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