Consolidation of Indian PSU banks and the way forward

• Published date: 01 February 2021
• Author: Sahil Singh Jasrotia,Tarun Agarwal
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2133

PRACTITIONER PAPER

Consolidation of Indian PSU banks and the way forward

Sahil Singh Jasrotia | Tarun Agarwal

Marketing, Jaipuria Institute of Management,

Indore, India

Correspondence

Sahil Singh Jasrotia, Marketing, Jaipuria

Institute of Management, Indore, India.

Email: sahiljasrotia93@gmail.com

The increasing non-performing assets (NPAs) and to meet the higher funding needs,

India witnessed the biggest consolidation in public sector banks. In India the surging

NPAs is long witnessed concern and major economic reforms were initiated in Indian

banking to curb the issue. The recent merger has brought in a major policy concern

with this consolidation which is availability of loans to smaller businesses. The paper

analyses the impact of banks consolidation on Indian economy by considering both

positive as well as negative aspects of banks mergers. The paper also presents the

history of Indian banking and recommending a way forward.

1|INTRODUCTION

In an attempt by the Government of India to make Indian banks capa-

ble of meeting higher funding needs of the economy and acquiring

the global scale, the biggest consolidation in public sector banks has

left India with 12 banks. In India post-liberalization, major economic

reforms were initiated by way allowing greater FDI leading to resur-

gence in the Indian banking. In all 22 mergers took place in this period;

both on account of weaker banks and business growth synergies. The

major policy concern that this consolidation may have is the availabil-

ity of loans to SME's (small and medium enterprises) or even smaller

businesses. Smaller businesses have always relied on banks for their

credit needs whereas the larger businesses depend on direct access to

national credit market (Peek & Rosengren, 1998). There have been

number of studies raising issues of bank consolidation and impact on

credit availability with numerous other policy level issues (Babajide,

Olokoyo, & Taiwo, 2016; Craig & Hardee, 2007; DeYoung, Gold-

berg, & White, 1999). A study on Asian market by Olivero, Li, and

Jeon (2011) concluded that as consolidation in banking sector

increases, the lending power gets weakened. The risks of consolida-

tion of Indian banks are considerable because Indian economy

requires a well-structured banking system with sufficient credit lend-

ing capacity to enable corporate growth and economic expansion by

appropriate funding. After the consolidation, larger banks will be

expected to lend more by taking additional risks which may affect the

risk profiles of the banks if it is done without proper governance. To

increase the advisory oversight RBI proposed that banks should have

a position of chief risk officer (CRO) and ensure that high standards of

risks management are maintained (Ray, 2019). The position of CRO

may be difficult to implement at market rate because pay in Indian

public sector banks is well below that of Indian private sector banks.

The purpose of the paper is to identify the impact of banks consolida-

tion on Indian economy. The existingstudies in the area have looked at

consolidation from its impact on the banking sector (A. Ezeoha, 2007),

enhanced public administration, impact on productivity (Singh &

Gupta, 2015), analysis of consolidation more from the pointof view of

not only reduction in Banking entities, but also their profitability

(Di Patti & Gobbi, 2007; Kolapo, Ajayi, & Aluko, 2016). The current

study focuses on consolidation in the Indian economy where the pur-

pose is to bring to the fore various pertinent points related to advan-

tages and disadvantages of consolidation (Tables1 and 2).

2|LITERATURE REVIEW

Consolidation through mergers and acquisitions indicates one of the

major outcomes of the financial transformation process and contem-

porary trend in the Indian banking sector which has its effect on the

economy and especially at the grassroots level. Kuriakose and

Paul (2016) provided insights on the strategic and financial similarities

of merging partners at consolidation in India in the post-liberalization

phase of the country, the paper has considered important aspects

such as relative size of targets, diversity of earnings, efficiency, finan-

cial leverage, prudential norms and profitability and their study helps

in giving a different perspective toward understanding banking

consolidation.

A study by Mohan (2005) looks at Indian bank mergers as not a

compelling proposition on account of their profitability and

Received: 17 September 2019 Revised: 9 December 2019 Accepted: 9 March 2020

DOI: 10.1002/pa.2133

J Public Affairs. 2021;21:e2133. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of5

https://doi.org/10.1002/pa.2133