Implications of Recent Bank Mergers

Abstract

On 30 August 2019, the Finance Minister of India sprung a surprise by announcing a major consolidation of stateowned banks that would involve ten of them being merged to four. The mergers are expected to be completely by mid-2020. Some banks have already started the action. For example, the Board of Allahabad Bank has approved, on 16 September 2019, the merger proposal with Indian Bank. This move will reduce the number of state-owned lenders to twelve from twenty seven in 2017- a reduction of more than 50% in two years. The chairman of the largest state-owned bank in India welcomed the recent consolidation announcement and stated that ‘bigger banks have better ability to absorb shocks, reap economies of scale as well as the capacity to raise resources without depending unduly on the exchequer’1 . The Finance Minister has outlined three objectives for the recent merger: (a) to strengthen a sector struggling with poor asset quality, (b) to create banks with strong national presence, and (c) to create lenders of global scale that can support the economy’s target of $3 trillion GDP by 2024.