RBI thinks merger of PSBs is the way to purge the sector of its ills

New Delhi: Batting for consolidation of banks, the Reserve Bank of India (RBI) has urged the government to consider merging banks in the public sector to help lenders lower costs and efficiently scale their operations. Researchers at the Reserve Bank of India (RBI) said that state-run banks performed better than private sector banks in terms of labour cost efficiency or output per employee because they had slowed down hiring and had adopted technology. They noted in their research that larger banks had reaped the benefits of scale.

"This finding provides an additional rationale for recent mergers of banks, both among public and private sector banks, and suggests that further avenues of consolidation in the banking sphere may be explored," the researchers wrote.

Mergers could address the NPA scourge

Both the RBI and the government have been advocating merger of banks because of the overhang of bad debts which is driving up the cost of capital. Therefore, off late, mergers and bailouts have become a key policy followed by the Centre to purge the sector of the bad loan problem. The government is now also looking at the merger of Dena Bank and Vijaya Bank with Bank of Baroda (BoB) as an example which turned the merged entity into India's third largest lender. To make its case, the RBI research paper also mentions that the number of cost-efficient banks in India has reduced from 19 in 2005 to 14 by the end of 2018.