DMPQ- How does merger of banks affect the financial ecosystem. Critically analyse.

The Finance Minister has announced the biggest consolidation plan of Public sector Banks (PSBs)- merging 10 of them into just 4.  Merger is in line with the recommendation of Narsimhan committee recommendation of creating few banks of big size ( global average). There are no banks in top 50 global banks and the role of big banks in wealth creation cannot be ruled out.

Merger will increase the efficiency of the banks. : All merged banks in a particular bucket share common Core Banking Solutions (CBS) platform synergizing them technologically.

It has the potential to reduce operational costs due to the presence of shared overlapping networks. And this enhanced operational efficiency will reduce the lending costs of the banks.

Monitoring: With the number of PSBs coming down after the process of merger – capital allocation, performance milestones, and monitoring would become easier for the government.

                Increase in the geographic penetration of the big banks which will be enhanced by the addition of merged bank customer. Overall the NPA is estimated to be going to reduce. Further the risk aversion tendency will reduce.

The overall operational cost reduction will create additional funds to be utilised for creation of digital infrastructure, Human resource management, Incentives etc.

 

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