ET View: India needs large banks

Finance Minister Nirmala Sitharaman’s announcement to merge ten public sector banks at one brush into four large lenders to enable India become a $5 trillion economy makes sense. It is in the interest of the Indian economy to have large banks that can lend to large companies, given the greater segmentation of credit now – say with small finance banks giving credit to small and medium industries. So, creating banks of different sizes that includes a few large banks and fostering competition among them will bring in more efficiency, lower operating costs and prove beneficial for deposit growth.

The proposed series of mergers — Punjab National Bank taking over Oriental Bank of India and United Bank of India; Canara Bank acquiring Syndicate Bank; Union Bank taking over Andhra Bank and Corporation Bank and Indian Bank taking over Allahabad Bank – will improve the quality of loan books and the ability of banks to meet financial obligations. This, in turn, could lower the capital infusion for banks for provisioning against bad loans.

There could well be operational complexities, and synergies may not be that easy to find. However, the government has dispelled fears that the diseconomies of scale in bank mergers would be huge and synergy, hard to find. On the contrary, it reckons that mergers will lead to banks having national presence and global reach, spur credit growth and lower the cost of lending.

Governance reforms – that includes the appointment of a chief risk officer at market linked salaries and making the management accountable to the board are fine. The need is to reform the ownership structure of PSBs to give banks more functional and operational autonomy. That would mean creating a holding company that owns a majority of the equity in every public sector bank. Bonds, instead of bank loans, must fund large, long gestation infrastructure projects.

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