For any economy to prosper and grow, the banking sector has to play a pivotal role. The Indian economy has seen many corrections but the biggest of them is coming in recent years in the form of Mergers and privatisation of Banks. To understand why this move has come, let’s go back in time to know more about the Indian Banking system.
India after the rule of Britishers ended in 1947 and they had left an economy that was in shambles. Banks were there at that time but they were catering to rich. Majority of India didn’t have an opportunity to use banking facilities. Then, Indian govt led by PM Smt Indira Gandhi Ji in the year 1969 called for Nationalisation of Banks. As many as 14 banks got nationalised and Indian Govt took the ownership. Making it easier for people to open bank accounts and transact. In 1980, six more banks got nationalised and the total Public Banks in India jumped to 20. In the next step, govt added 5 SBI Subsidiaries making it 25 Banks.
5 SBI Subsidiaries were:
• State Bank of Hyderabad
• State Bank of Patiala
• State Bank of Travancore
• State Bank of Bikaner & Jaipur
• State Bank of Travancore
Next important addition came in as IDBI bank was formed making it 26 banks. Thus during 1969 to 1990, India had 26 banks under Govt’s control.
In the second phase from 1990 to 2014 saw the consolidation of the banks as well as the build-up of NPAs. 1991 knocked the doors of new policies and reforms. India welcomed LPG – Liberalisation, Privatization and Globalisation. This has brought a sea of change in the way banks operated. Indian Public Banks couldn’t take the competition of Private and Foreign players. NPAs or Bad Loans started to increase vehemently. Corruption in Public Sector Undertakings (PSUs) increased. We have the big businessmen like Vijay Mallya, Venkat Ram Reddy of Deccan Chronicle, Lagadapati family of LANCO and many others had looted the banks using their power and the political influence and increased the NPAs of these banks.
This has reached such enormous proportions that the total NPAs as on 31st December stood at $145 billion, which is equal to the entire GDP of Kuwait, the oil-rich country in the middle east. In Indian rupees, the amount equals to 8.4 trillion rupees as on 31st December 2017. This was at unacceptable levels and PSUs were highly impossible to run. Bank recapitalization was becoming a formality bringing no difference to the Banks.
Bank wise NPAs
• State Bank of India – 2 trillion ₹
• Punjab National Bank – 552 billion ₹
• IDBI Bank – 445 billion ₹
• Andhra Bank – 252 billion ₹
This 8 trillion rupee is roughly 5% of the GDP and even if we reduce the NPAs by half, we can add 2.5% growth to our GDP. The BJP Govt which came to power in 2014 felt that the only way to control the NPAs in PSUs is to merge them and bring their number down so that they can be easily managed.
It began in 2015 with SBI associate banks were merged into the parent bank State Bank of India. This brought down the total PSUs from 26 to 21. Govt waited for the process of SBI associate mergers to get complete and wait for the results. Happy with the outcome, Govt merged Vijaya Bank and Dena Bank with Bank of Baroda in the year 2018 bringing down the total PSUs to 19 banks.
After that, in January this year, LIC acquired 51% share in IDBI bank making it a private bank and the number of PSUs are now 18. This all happened in the first term of BJP Govt. Once the BJP came back to power in May 2019, FM Nirmala Sitharaman called for big mergers in Banking Sector of PSUs.
• Indian Bank took over Allahabad Bank – left with 17 banks
• Andhra Bank, Corporation Bank merged into Union Bank – left with 15 banks
• Syndicate Bank merged into Canara Bank – left with 14 banks
• Oriental Bank of Commerce and United Bank of India got merged into Punjab National Bank – left with 12 PSU Banks
This way Indian Govt has brought down the total no of PSUs from 26 to 12 in a matter of 6 years. We now have 12 PSU banks, 6 Big and 6 small.
• SBI, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank and Indian Bank are the large PSU Banks.
• Indian Overseas Bank, UCO Bank, Bank of Maharashtra, Punjab and Sindh Bank, Bank of India and Central Bank of India are the 6 small PSU banks.
But, the work is still half done. Indian Govt will clearly be planning to bring down the number from 12 to single digits.
This will make it easy for the Govt to handle the banks. It’s already a paradigm shift in Indian Banking. Importantly, the policies and reforms in Banking are also equally posed with strict restrictions on the loan conditions and limits.
Very soon if the things go as planned then the Public Banks will stand at 8-10 and will compete with a similar set of Private banks. 2024 can be a nice comparison point!