Government begins work to consolidate regional rural banks, aims to reduce tally to 36

by Elton Gomes

The government has begun work on the consolidation of regional rural banks along with the public sector lenders and intends to bring down the number to 36 from the existing 56.

The Centre has initiated consultations with states as they are one of the sponsors of the Regional Rural Banks (RRBs) in the country, a senior Finance Ministry official said. Additionally, sponsor banks are also preparing a blueprint for the amalgamation of RRBs within a state, the official said, PTI reported.

Why is this step being taken?

The Finance Ministry claims that the consolidation of RRBs and reducing their tally from 56 to 36 will lead to better scale-efficiency, higher productivity, robust financial health of such banks, improved financial inclusion, and greater credit flow to rural areas, an official from the ministry said. In addition, the move will allow RRBs to lower their overhead expenses, optimise the use of technology, enhance the capital base, and area of operation, the official added, according to a PTI report.

Government proposes merger of Bank of Baroda, Vijaya Bank, and Dena Bank

The amalgamation of RRBs comes just days after the merger of three banks was announced. The Centre on Monday proposed the merger of Bank of Baroda, Dena Bank, and Vijaya Bank. The move would result in the creation of India’s third largest bank as part of reforms in the public sector banking segment.

“This major decision was taken by an Alternative Mechanism today to amalgamate Bank of Baroda, Dena Bank and Vijaya Bank. While making this suggestion, we have borne in mind that we don’t want a merger of what are relatively weak banks,” Union finance minister Arun Jaitley said.

Jaitley said further, “You can have two well performing banks absorbing a weak one in the amalgamation process and hopefully creating a mega bank that will be sustainable, whose lending ability which will be far higher,” the Hindu reported.

However, bank unions opposed the Centre’s decision and called it unwarranted. They said that it was the government’s diversionary tactics to take away focus from the huge levels of bad loans.

“There is no evidence that merger of banks would strengthen the banks or make it more efficient. We have seen the example of five associate banks merging with SBI. No miracle has happened,” All India Bank Employees’ Association said in a statement. “On the other hand, it has resulted in closure of branches, increase in bad loans, reduction of staff, reduction in business, etc. For the first time in 200 years, SBI has gone into a loss,” Live Mint reported.

Banking experts did not approve of the move as well. “This merger is negative for Bank of Baroda and Vijaya Bank. The merger has to go through parliamentary approval, which will be a critical factor considering general elections are slated for next year,” Ashutosh Mishra, an analyst at Reliance Securities Ltd, said, as per the Live Mint report.

Is amalgamation the only solution?

Although amalgamations might have some merits, banks are more likely to suffer than prosper in the event of a merger. In an opinion piece in Live Mint, M.S. Sriram notes that the decision to amalgamate banks seems to have been taken without any consultation.

Sriram opines that the government does not seem to carry out any kind on consultation with the RRBs’ boards. Sriram further points out that letter from the ministry simply asks the chairmen/managing directors to send a no-objection before a certain date. The letter does not wish to debate the proposal with anyone. This forced merger of RRBs, Sriram claims, can only be seen as “tyranny,” and should be a warning bell for public-sector banking reforms.

Elton Gomes is a staff writer at Qrius