Bank Merger: The Silver Lining in India’s Decelerating Economy?

The Government recently declared fusion of several state and national banks. The motive behind this step, according to the government, is to create larger as well as healthier lenders in the Indian economy.Such mergers are expected to plummet the number of state-owned banks from 27 to 12. However, the duration which is needed for integration supplemented by the challenges related to staff, branch and other internal procedures are posited to be the primary jeopardies. These mergers will culminate in state-run banks being exceedingly hectic for a prolonged period of time. The ripples of this extensive integration process will encourage private banks to further consolidate their business market share.

These mergers are ostensibly tangible and would reinvigorate the banking system in the medium and long run. However, such a move, at a time when the economy is growing at its slowest pace in six years is being considered a 'diversion' by some analysts. This government announcement is being painted as a step to divert the attention from the economic lag to the merger of banks. A side effect of such a move may lead to the credit growth plunging as it did in 2016, when demonetization by Mr. Modi made bankers accountable for exchanging old bills for new, leaving them with no time to dispense loans.

On a secondary note, it has been observed that historically when state-owned banks merge, smaller banks' loan-book growth decelerates, as the chief focus of management shifts to integration. Businesses may also be disrupted by strikes threatened by the banks' employee unions. Thus, even though this step will prove to be valuable in the future, it will create substantial inconvenience right now.

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