Answer Writing Practice for UPSC IAS Mains Exam: Paper - IV (General Studies – III) - 19 September 2018

Answer Writing Practice for UPSC IAS Mains Exam

UPSC Syllabus:

  • Paper-IV: General Studies -III (Technology, Economic Development, Bio-diversity, Environment, Security and Disaster Management)

Q. Government has recently announced the merger of three state-owned banks. Discuss the rationale, significance, and challenges associated with such a move. (250 words)

Model Answer:


  • Why in news?
  • Introduction
  • Rationale
  • Significance
  • Challenges
  • Conclusion

Why in news?

The government has announced the amalgamation of three banks — Bank of Baroda, Vijaya Bank and Dena Bank — aimed at creating the country’s third-largest bank with a business of Rs 14.82 lakh crore and over 9,600 branches across the country.


The decision of merger is in line with the recommendations of the RBI Governor M Narasimham committee in 1991. The committee recommended a restructuring of Indian banks, with three or four large banks including State Bank of India that could be positioned as global banks, besides eight to ten with a national footprint or presence, rather than having over two dozen state-owned banks.


  • Having several state-owned banks is not a sensible strategy as they are all virtually doing the same business, and competing for the same pie of customers. It also means a lower return on the capital employed by the government which has competing demands for funds, and growing competition.
  • It is always challenging to raise capital that the owner (the government) has to provide periodically to PSBs. Consolidation of a weak entity with two stronger ones is likely to reduce this capital demand.
  • The weak state of some of the banks may have been the tipping point. Consolidation of a weak entity with two stronger ones is likely to put up a big entity with better prospects.


  • The decision of merger is in line with the recommendations of RBI Governor M Narasimham committee in 1991. It recognizes the need for consolidation in the sector and put an end to fragmentation.
  • The move signifies that the government has been emboldened by the experience of the merger of five subsidiaries of the State Bank of India last year to create a bigger entity.
  • Generally, merger of two strong banks is recommended, but this time it will feature at least one very weak bank — Dena Bank, which has severe restrictions on lending and expanding its business. The move will not just save the weaker entity but also put up a big entity with better prospects.
  • Mergers are often advocated on the basis of synergies. These could be in terms of operational efficiency with a large pool of staff in a merged entity being put to work for boosting business, expanding reach and offering more services or products. On a standalone basis, Vijaya Bank had strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers.
  • From the government’s and regulator’s point of view, the move will lead to a lower NPA (non-performing assets) ratio for the new bank compared to the individual NPA ratios for these banks.
  • This could mean down the line in lower requirements of capital from the government and also the ability of a large bank to lend more on the strength of its higher capital base (12.25 %) and to expand the business, rather than being dragged down because of weak financials and being forced not to lend.


  • The challenge is integration in a new entity, whether in operations or culture. It helps that the three banks chosen have a common technology platform, which may make it work like in the case of the SBI and its subsidiaries.
  • Human resources can often be a deal breaker: contrasting HR practices and aligning these with employee expectations or aspirations will also test the new management.
  • The other major test will be leadership — choosing one of the CEOs to head the new bank and with a reasonable tenure. Addressing the concerns of unions and shareholders by the new leadership may be tricky.


Bank consolidation may be desirable in the current scenario, but one should not lose sight of the fact that India needs more banks. So RBI, as well as government, should move cautiously.

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