Recently, with the announcement of bank merging by the finance minister of India, led to the rise of debates and arguments on whether it is useful for the economy or not. Before judging that let us know about the process and what merging of bank actually means and its functioning.Firstly the idea is not new. It has been since 1991 when the Narasimhan committee recommended merging of PSUs (Public Sector Undertakings).
What is bank merging?
It is when two or more banks pool their assets and liabilities to become one bank. Currently the government plans to merge 10 PSUs into four –
- Punjab National bank, Oriental bank of commerce and United bank of India will combine to form the nation’s second largest lender.
- Canara bank and Syndicate bank.
- Union Bank of India will merge with Andhra and Cooperation bank.
- Indian bank will merge with Allahabad bank.
What is the need?
The government targets to achieve two things by the merging of banks. One is reducing bad loans and the other is increasing lending activities which will revive investments in economy.
- There might be problems to adjust top leadership in institutions and the unions.
- Mergers will result in clash of different organizational cultures.
- When a big bank experiences huge loss or crumbles there will be a grat impact in the entire banking industry.
- PSBs which are restricted to a specific area can expand their coverage beyond their outreach.
- Reduction in the cost of doing business.
- Mergers can diversify risk management.
So, merging of banks will be effective and will yield the desired results only if they are carried out and processed otherwise it can backfire.