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Key Highlights on Mega Consolidation of PSB

In an effort to give boost to the economy, the Finance Minister, in a press conference today announced mega consolidation of Public Sector Banks (PSBs). The FM said that merger would give a high CASA and lending capacity combined in the consolidated bank. The merger would enable large cost reduction due to network overlaps, and result in cost saving and income opportunities for the joint ventures and subsidiaries.

The FM also announced additional measures that are taken to improve governance and functioning of public sector banks such as flexibility to banks introduce Chief General Manager, increase in sitting fee of the non-executive directors. Mandatory appointment of Chief Risk Officer in state run banks with adequate powers to take decisions in discharging his duties.

The key takeaways of the press conference are as under:

  1. Mergers of PSBs:
    PNB, OBC & United Bank
    The consolidation of PNB, OBC and United Bank would become 2nd largest PSB with around Rs 18 lakh crore business and 2nd largest branch network in India. The merger would bring about high CASA and therefore higher lending capacity.
    Merger of Indian Bank, Allahabad Bank’
    Indian Bank and Allahabad Bank will merge to form the 7th largest PSB with a business of Rs 8.08 lakh crore. Indian Bank will be anchor bank.
    Union Bank, Andhra Bank, Corporation banks merger
    Union Bank of India, Andhra Bank and Corporation Bank will merge to become the 5th largest PSU bank with a business of Rs 14.59 lakh crore, this merger would result into large cost reduction due to potential network overlap.
    Canara Bank and Syndicate Bank
    Canara Bank and Syndicate Bank would be merged together, which will be the fourth largest PSB, with a business of 15.20 lakh crore
  2. Mandatory appointment of ‘Chief Risk Officer’
    In order to improve governance and better management of the banking system, the PSU banks’ boards will be given flexibility to introduce Chief General Manager. The state-run banks will also have to appoint a chief risk officer, who will be provided market-level compensation. The FM further said that for improving governance of the PSBs, boards will be given flexibility to enhance sitting fees of non-official directors.
  3. Longer terms to directors on management panels’
    Boards of the PSBs will be given a mandate for the training of directors, both for induction and specialisation purposes, said FinMin. Longer terms would be given to directors on management committees to ensure continuity and to improve governance.
  4. Merging of banks which are on same technological platform:
    The FM said that that there should not be any disruption to the customers due to the mega consolidation, and hence it has been ensured that the banks which are merging that they operate on the same technological platform. “Technology which is used in bank 1, bank 2 and bank 3 are compatible and all three banks can enable a quick realisation of gains without customer disruption, or any other disruption in services that they lend” said FM.
  5. Regional banks to continue to operate due to strong regional presence
    The FM said that in order to strengthen the regional presence, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab and Sindh Bank will continue to operate due to their strong regional presence
  6. Consortium of bank limited to 7-9 banks:
    The FM said that the consortiums of banks which can fund projects would now be limited to 7 to 9 banks no matter how big the project is. This measure would give banks better control over projects.
    Other key reforms includes a) separation of sanctioning of loans and monitoring for better management b) formation of special agencies to monitor loans above 250 Crores to avoid instance like Nirav Modi

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