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  • State – owned bank of Baroda, Vijaya Bank and Dena Bank will be merged to create the countries third largest lender as part of efforts to revive credit and economic growth.
  • The Move follows top lender state bank of India last year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila bank, a niche state run lender for women.
  • The finance minister assured that merger will make banks stronger and sustainable and increasing lending ability.
  • Bad loans and stressed asset together has plagued the banking sector and hurting corporate sector investments.
  • The government owns majority stakes in 21 lenders, which account for more than two – thirds of banking assets in the Asia’s third biggest economy.
  • But these PSU banks also account for the lion’s share of bad loans or NPA playing the sector and needs crores of rupees in new capital in the next two year’s to meet global BASEL III capital norms.

Background:

  • The Banking sector in India is confronted with a severe NPA’s and stressed assets and this throws a major challenge for government of India.
  • The Government has takes various steps from IBC code to enacting prompt action plan and now started merging banks.
  • The State Bank of India has already merged 5 of its subsidiary including ‘Mahila bank’

Impact of this move:

  • This move is the first step in solving the problem of NPA’s but many things need to be done.
  • This will reduce the number of banks in our country which will reduce the dilemma of the government to ‘Whom should be capitalised’.
  • Many large economy in the earth do not have too many public sector ban as India.
  • There are risks involved in this move, if the NPA does not get resolved then the healthy bank will get bankrupted.
  • If three banks are going to be amalgamated then it creates a new unified fourth entity.
  • If one banks out of these three has performed well and other two with loaded – up NPA’s then the created fourth entity NPA’s would probably be high.
  • The Board member’s of the bank ultimately has to decide when the bank should merge, which will further delay the process.
  • The Trade Union’s has already started opposing the move.

Is Privatization a good option?

  • There are two major issues involved in it.
  • The Government willingness to give up the ownership of the bank.
  • “Who will buy these stakes?”,  A big Question as in the case of ‘Air India’ where no bidder came forward to buy the debt ridden state of Air India.

Way Forward

  • Reducing government interference by reducing the state of the Government to 33%.
  • Let RBI regulate the banks rather than department of Financial Services, Ministry of Finance.
  • Reducing long tenure of senior manager’s.
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