April 07, 2020

Banking Reforms and Merger of the Banks

Banking Sector Reforms During
Nationalization in India
The financial Regional Rural Banks 
The nationalization of the banks in 1969 boosted the confidence of the public in the Banking 
system of the country. However, in the early 1970s, there was a feeling that even after 
nationalization, there were cultural issues which made it difficult for commercial banks, even under 
government ownership, to lend to farmers. This issue was taken up by the government and it set 
up Narasimham Working Group in 1975. On the basis of this committee’s recommendations, a 
Regional Rural Banks Ordinance was promulgated in September 1975, which was replaced by the 
Regional Rural Banks Act 1976. 
Genesis of Regional Rural Banks 
Regional Rural Banks came into existence on Gandhi Jayanti in 1975 with the formation of a 
Prathama Grameen Bank. The rural banks had the legislative backing of the Regional Rural 
Banks Act 1976 . This act allowed the government to set up banks from time to time wherever it 
considered necessary. 
The RRBs were owned by three entities with their respective shares as follows: 
Central Government → 50% 
State government → 15% 
Sponsor bank → 35% 
Regional Rural Banks were conceived as low cost institutions having a rural ethos, local feel and 
pro poor focus. Every bank was to be sponsored by a “Public Sector Bank”, however, they were 
planned as the self sustaining credit institution which were able to refinance their internal 
resources in themselves and were excepted from the statutory pre-emptions. 
Problems with Regional Rural Banks 
But the original assumptions were belied as within a very short time, most banks were making 
losses. The RRB concept was based upon the policy that they would lend only to the weaker 
sections of rural society, charging lower interest rates, opening branches in remote and rural areas 
and keep a low cost profile. But the commercial motivation was absent. 
Initially the banks expanded and by the end of year 1985 RRBS had opened 12606 branches. 
During this period their credit deposit Ratio (C.D.R) expanded very fast. In 1976 it was 165% and 
gradually declined to 104 % in December 1986. The Credit Deposit Ratio continuously declined 
Later, the questions started being raised about the viability of these banks. The Khusrau 
Committee of 1989, noted that the weaknesses of RRBs are endemic to the system and non- 
viability is built into it, and the only option was to merge the RRBs with the sponsor banks. The 
objective of serving the weaker sections effectively could be achieved only by self-sustaining credit 
institutions. RRBs were finding themselves unable to sustain because of the mounting losses due to 
imprudent commercial policy. Thus, Khusrau Committee (aka Agricultural Credit. Review Committee) said that the RRBs have no justifiable cause for continuance and 
recommended their mergers with sponsor banks. 
But by that time, the branch network had expanded so large that it would be political unwise for 
the government to merge the RRBs with sponsor Banks. 
Recommendations of Narsimham Committee on RRBs 
The Narsimham Committee in 1990s also reiterated that the RRBs should be merged with the 
sponsor banks. By 1993, 172 of the 196 RRBs were recorded unprofitable. The paid up capital 
which was ` 25 Lakh at that time was not able to absorb the loan losses of most of the RRBs. The 
loan recovery was around 40%. The First Narasimham Committee recommended that the RRBs 
should also be permitted to engage in all types of banking business and should not be forced to 
restrict their operations to the target groups. The Narasimham committee also recommended 
that there should be mergers of the RRBs with their sponsor bank, BUT the “sponsor banks might 
decide whether to retain the identities of sponsored RRBs or to merge them with rural subsidiaries 
of commercial banks to be set up on the recommendation of the committee”. The first 
recommendation of letting the RRBs do all businesses was accepted by the government. 
Some measures were taken by the Reserve Bank of India also. It allowed the RRBs to relocate 
their branches if they were making losses at one location for more than 3 years. They were also 
allowed to finance the non-target groups to the extent not exceeding 40 percent of their 
incremental lending. This limit was subsequently enhanced to 60 percent in 1994. As a result, the 
RRBs diversified into a range of non-priority sector (NPS) advances, including jewel and deposit- 
linked loans, consumer loans and home loans 
Some efforts were done by NABARD with funding support of the Swiss Development Corporation 
(SDC). It took a number of HR and Organizational Development in these banks. 
Turnaround of RRBs 
The above discussion makes it clear that most RRB were making loss and had deviated from the 
original idea that had created them. But there were some profit making RRBs also. Some reforms 
led the rise in the number of the profit making RRBs but most of them were having a low credit 
deposit ratio. This was coupled with the decreasing percentage of loans to small and marginal 
farmers out of the total loans disbursed by the RRBs. The RRBs NPA level was high. In the early 
2000s there was no prescribed CRAR (capital to risk weighted asset ratio) for the RRBs. In 2005, 
based upon the recommendation of an internal working group the RRBs were asked to maintain a 
capital to risk weighted asset ratio at 5% and over the period of time they were expected to align 
themselves to Basel I standards. However, the major reform was to merge the RRBs with the 
sponsor banks.There were 196 RRBs sponsored by 27 SCBs and one State Cooperative Bank were operating in 
the country with a network of 14,484 branches spread over 523 districts as on March 31, 2005. 
The government started the process of consolidation and amalgamation in 2005, bringing the 
number down to 82 in 2010. 
As of March-end, 2011, the total number of RRBs stood at 82. This number fell to 64 in March 
2013. As of March 2014, the number of RRBs has been reduced to 57. After the 2014 elections, the 
new NDA government has put hold on further amalgamation of the Regional Rural Banks. The 
focus of the new government is to improve their performance and exploring new avenues of 
investments in the same. Currently, there is a bill pending to amend the RRB Act which aims at 
increasing the pool of investors to tap capital for RRBs. 
Regulation of RRBs 
Regional Rural Banks are regulated by National Bank for Agriculture and Rural Development 
(NABARD). Please note that currently seven states viz. Tripura, Nagaland, Manipur, Mizoram, 
Arunachal Pradesh Meghalaya and Puducherry, have state-level RRBs. Gujarat and Karnataka too 
have demanded formation of state level RRB. In case of West Bengal, the state Assembly took 
unanimous resolution in favour of State level RRB in the year 2004 sector reforms are one of the most important policy agenda of the authorities around
the world. There are several reasons for the same.
Firstly, the reforms are needed to increase the efficiency of financial resource mobilizations
and generate higher levels of growth.
Secondly, financial sector reforms are utmost necessary for the macro-economic stability.
India saw its worst economic crisis in the decade of 1980s.
In 1991, India embarked into an era of Economic Reforms which led to liberalization, privatization
and globalization of the Indian Economy. The financial sector reforms were an integral part to
these reforms. The financial sector reforms got momentum with the recommendations of various
committees such as Chakravarty Committee (1985), Vaghul Committee (1987) and most notably
by Narasimham Committee (1991), which is also known as first Narasimham Committee.
Importance of year 1991
Prior to 1991, India was more or less an isolated economy, loosely integrated with the economy of
rest of the world. The public sector was born out of a planned economy model, which was
underpinned by a Nehruvian-Fabian socialist philosophy. In 1991, India embarked on the path of
liberalization, privatization and globalization. This injected new energy into the slow growing Indian
Economy. With reference to Banking sector, it was in this year that the first Narasimham
Committee gave a blueprint of banking sector reforms. On the basis of these recommendations,
the government launched a comprehensive financial sector liberalization programme which
included interest rates liberalization, reduction of reserved rations, reduced government control in
banking operations and establishment of a market regulatory framework. Another outcome of
liberalization was the dismantling of prohibitions against foreign direct investment. Some more
outcomes of reforms that impacted the banking sector were:-
Steps were taken to move to a market determined exchange rate system, and a unified
exchange rate was achieved in the 1990s itself
The government also released a slew of norms pertaining to asset classification, income
recognitions, capital adequacy etc which the banks had to comply with
Current account convertibility was allowed for the Rupee in accordance with IMF conditions
Nationalized banks were allowed to raise funds from the capital markets to strengthen their
capital base
The lending rates for commercial banks was deregulated, thereby freeing them to lend more
or as they saw fit
Also, banks were allowed to fix their own interest rates on domestic term deposits that
matures within two years
Customers were encouraged to move away from physical cash, as RBI issued guidelines to
the banks pertaining to the issuance of debit cards and smart cards
The process of introducing computerization in all branches of banks began in 1993 in line
with the Committee on Computerization in Banks' recommendations, which had been submitted in 1989
FII (Foreign Institutional Investors) were allowed to invest in dated Government Securities
The Foreign Exchange Management Act (FEMA) was enacted in 1999 and effectively
repudiated the Foreign Exchange Regulation Act (FERA) of 1973. FEMA enabled the
development and maintenance of the Indian foreign exchange markets and facilitated
external trade and payments
The NSE (National Stock Exchange) began its operations in 1994
RBI began the practice of auctioning Treasury Bills spanning 14 days and 28 days
Capital index bonds were introduced in India for the first time. The newly adopted policy of
liberalization led the RBI to provide licenses to conduct banking operations to some private banks
such as ICICI Bank, HDFC Bank etc. The growth of industries and expansion of economic
operations also revitalized banking operations, which had to keep up with the demand for various
banking operations by the flourishing and even nascent enterprises.
Bankers also responded to the renewed demand from the industrial sector and regular customers.
New technology and customer-friendly measures were adopted by bankers to attract and retain
customers. The Banking Ombudsman was established, so that consumers could have a forum to
address their grievances against banks and the services they provided.Major Banking Reforms of 21st Century
India is one among the top 10 economies in the world. Banking sector in India is robust and forms
the most dominant segment of the financial sector. The banking industry acts as a pivot in the
economic development of the country. The face of the banking industry has been witnessing
changes over the years. The main objective of the financial sector reforms in India initiated in the
early 1990s was to create an efficient, competitive and stable financial sector that could then
contribute in greater measure to stimulate growth. For instance, the last decade witnessed the
embracement of ATM, internet and mobile banking.
Major Reforms of the Indian Banking Industry in 21
st century
Following are the major financial sector reforms in the recent years in India. All of the reforms are
aimed at creating efficient and stable financial sector which contributes in a major way to stimulate
Major reforms are:
The passage of Banking Laws (Amendment) Bill, 2011 has paved way for the entry of more
banks and foreign investments. The entry of new banks is expected to create competition
which will enable banks to improve their operational efficiency.
FDI ceiling for the banking sector got increased from 49% to 74%.
Liberal branch licensing policy has been adopted.
RBI has issued guidelines for priority sector lending certificates (PSLCs) to meet the priority
sector lending targets.
RBI has allowed the banks to hold additional reserves linked to property holdings, foreign
currency translation reserves and deferred tax assets by up to 35,000 crore (state-run
banks) and Rs 5,000 crore (privately owned banks) to increase their capital.
The scheduled commercial banks are permitted to grant non-fund based facilities including
partial credit enhancement (PEC) for those customers who do not possess any fund based
facility from any of the banks in India.
Ministry of Finance is planning to increase its capital support to the state-run banks by about
Rs 80,000-100,000 crore to boost their capital.
Under the Pradhan Mantri Jan Dhan Yojna (PMJDY) over 31 crores of bank accounts have
been opened by June 2018 as a part of financial inclusion campaign.
National Investment and Infrastructure Fund (NIIF) has been created in 2015 as a special
fund to deal with stressed assets of banks.
Challenges Ahead
The most prominent aftermath of the reforms is the increase in competition and impact on
profitability of banks. The challenge for banks now is to manage the narrowing down of the profit
margins while at the same time improving the productivity. Other challenges includes reinforcing
and adapting better technology to meet the customer needs, sharpening of management skills,
greater customer orientation, sharpening of risk management skills etc. With ever increasing competition, banks have to address the above issues if they need to survive in the changing
millennium.                                     Mega Bank Merger List 2020 : 10 PSU Merger into 4 Effective From 1st April 2020
The decision of the Central Government regarding the merger of 10 PSU banks into 4 becomes effective from 1st of April 2020. Let us go on to learn everything about the Bank Mergers List 2020 here in this article.
Mega Bank Merger List 2020
In a merger, there is an anchor bank and an amalgamating bank or banks, where the latter gets merged with the former.
(1) Mega Bank Merger List 2020
Read the Bank Merger List 2019-2020 below.
1. Punjab National Bank (PNB) will take over Oriental Bank of Commerce (OBC) and United Bank of India (UBI) to become the country's largest lender after State Bank of India (SBI) in terms of business.
2. Canara Bank will subsume Syndicate Bank;
3. Andhra Bank and Corporation Bank will merge with Union Bank of India; and 
4. Allahabad Bank will become part of Indian Bank.
With this, the number of public sector banks in India will come down to 12.
Six merged banks and six independent public sector banks.
1.1. Six Merged Banks are:
1. SBI (State Bank of India),
2. Bank of Baroda,
3. Punjab National Bank (PNB),
4. Canara Bank,
5. Union Bank of India,
6. Indian Bank
1.2. Six Independent Banks are: 
1. Indian Overseas Bank,
2. UCO Bank,
3. Bank of Maharashtra,
4. Punjab and Sind Bank,
5. Bank of India,
6. Central Bank of India.
This is an important development for the stressed and ailing Banking Sector of the country.
2. Brief about the Bank Merger List 2019-2020
Union Finance Minister Nirmala Sitharaman on 30th August 2019 had announced the consolidation of state-owned banks (PSBs) in which 10 PSBs being merged to form 4 bigger lenders to strengthen the Banking sector struggling with a bad-loan. The move was aimed at clean up of the Bank Balance Sheets and creating lenders of global scale that can support the economy's surge to $5 trillion by 2024. 
"Having done two rounds of bank consolidation earlier, this is what we want to do for a robust banking system and a $5-trillion economy. We are trying to build next-generation banks, big banks with the capacity to enhance credit," FM Sitharaman said. The key factors for the mergers were: Technological platformCustomer reachCultural similarities, and CompetitivenessFinance Secretary RajivKumar added.
Banks Ranked by Business size 1st- SBI 2nd-(PNB,OBC,United Bank) 3rd- HDFC 4th- Bank of Baroda 5th- (canra bank,Syndicate bank) 6th- (Union bank, Andra bank, Corporation bank)  7th- ICICI bank 8th- Axis bank 9th- Bank of India 10th- (Indian bank, Allahabad bank)   3. Reasons for Bank Merger
1. A key reason for the merger is the weight of mounting bad loans over the years.
2. Ostensibly aimed at improving operating efficiencygovernance and accountability and facilitate effective monitoring.
3. Creating globally stronger banks, doing away with needless overlaps in operations and infrastructure, and ushering in economies of scale to bring down costs have always been at the heart of any consolidation drive.
4. The move was aimed at creating next-generation banks with a strong national presence and global outreach accompanied with enhanced capacity to increase credit to the various important sectors of the economy.
4. Challenges to be Faced in Way of Merger
1. Managing Cultural Differences,
2. Managing Manpower 
3. Branch Rationalisation
4. Technological Integration 
5. Making Geographically Compatible Banks
5. Recapitalisation and Governance Reforms
1. The consolidation exercise will be accompanied by recapitalisation to the tune of Rs 55,000 crore (out of Rs 70,000 crore budgeted for 2019-20) capital infusion in public sector lenders as also governance reforms.
2. The biggest chunk of recapitalisation will go to PNB, at Rs 16,000 crore, followed by Union Bank at Rs 11,700 crore — the two anchor banks for the merger. Bank of Baroda is set to get Rs 7,000 crore as capital and Canara Bank Rs 6,500 crore.
3. Punjab and Sind Bank will get Rs 7,050 crore; Central Bank of India will get Rs 3,300 crore; UCO Bank will get Rs 2,100 crore, and Bank of Baroda will get Rs 600 crore.
As part of the governance reforms, Sitharaman said non-official directors at state-run lenders will have to function like independent directors on company boards. Boards will be peer-reviewed. The number of executive directors has been raised to four and boards have been given the mandate to reduce and rationalise board committees. Public sector banks will also be able to appoint a chief risk offer at market rates.
The decision to merge banks is a good remedial measure, but continued focus on corporate governance and adherence would be of prime importance. 
6. How the Financials of Merged Bank Entities will change? 
1. Among the four mergers, the combined entity of Allahabad Bank and Indian Bank will have the lowest net NPA (non-performing assets), while boasting the highest provisioning coverage and strongest CASA (current account and savings account) franchise.
2. "Indian Bank's merger with Allahabad Bank will help it emerge as a strong entity with reach, improving provisioning coverage ratio (PCR) and strong CASA ratio," suggests Bumb. The merged entity also has the least branch overlap. However, this diversity in cultures may prove challenging during integration and may also lend no major cost benefits from the merger.
3. Further, Indian Bank will see deterioration in its asset quality owing to Allahabad Bank's unhealthy loan book.
4. Greater synergies are likely to accrue from the merger of Syndicate Bank with CanaraBank as both have similar cultures and geographical presence. The merged entity will become the fourth-largest lender in the country, with better provisioning and capital ratios post-merger.
5. The combined entity of Union Bank will see improved provisioning and capital ratio after the merger with Andhra Bank and Corporation Bank. However, its asset quality position will take a hit, with the merged bank likely to report the highest gross NPA ratio among the four entities.
7. Effect on Customers of Banks
Retail customers of the amalgamating banks are likely to get directly affected whereas customers of the anchor bank are not likely to face much change. However, shareholders of all banks involved in the mergers are bound to be impacted.
8. Effect on Manpower Hiring
Reduction in fresh recruitment will be a natural consequence of any merger as the rationalisation of branches and staff will have to be worked out to optimise resources,'' a senior PNB official. It is likely to impact the overall job market scenario.
9. Core Banking Solutions of the Banks to be Merged
Public Sector Bank Rank by Size- (Punjab National Bank, Oriantal Bank of Commerce, United Bank of India)- 2nd Largest Bank  ( Canara  Bank,Syndicate bank)- 4th Largest Bank  (Union Bank,Andrea bank, Corporation bank)- 5th Largest Bank (Indian Bank, Allahabad bank)- 7th Largest Bank.             This was all from us in this blog of Bank Merger List 2020. We hope that you liked the information useful about the Bank Merger List 2020.

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