ESSAY ON BANK MERGER IN INDIA

BANK MERGER IN INDIA

Introduction

Merger is a process in which two or more companies decide to come together and merge together and create a new company. In bank merger the previously distinct banks are consolidated into one institution. When a merger occurs, an independent bank loses its identity and becomes a part of an existing bank with one headquarter and is driven by a unified control. Mergers in Indian banking system have been initiated through the recommendations of M Narasimham Committee. Basically, the merger helps in reducing the weakness and gets a competitive edge in the market. 

Recently, on 1^st April, 2020 the largest ever merger of the Public Sector Banks has come into effect in India. In this process ten Public Sector Banks to be merged into four large banks in a bid to make them globally competitive. Under the plan, Oriental Bank of Commerce and United Bank of India will be merged with Punjab National Bank; Canara Bank with Syndicate Bank; Andhra Bank and Corporation Bank with Mumbai-based Union Bank of India; and Allahabad Bank with Indian Bank. After this merger there will be 12 banks in 2020 from 27 banks before 2017.

This exercise has assumed significance as it has started taking place at the time when the entire country is under the grip of COVID-19 outbreak. Experts are of the opinion that merger at this point of time will not be very smooth and seamless. The four anchor banks – PNB, Canara Bank, Union Bank and Indian Bank has also postponed some part of the implementation process due to the lockdown. Following this merger, PNB will become the second largest after the State Bank of India, Canara Bank fourth, Union Bank of India fifth and Indian Bank seventh biggest public sector lender.

Background of Bank Merger

For years, expert committees starting from the M Narasimham Committee have recommended that India should have fewer but bigger and better managed banks to ensure optimal use of capital, efficiency of operations, wider reach and greater profitability. The logic is that rather than having several of its own banks competing for the same pie (in terms of deposits or loans) in the same narrow geographies, it would make sense to have large sized banks. It has also been argued that such an entity will then be able to respond better to emerging market trends or shifts and compete more with private banks.

Merger of 10 PSU Banks into 4 large Banks

Importance of Bank Merger

For over decades starting from 1992, the government as the biggest shareholder of over 25 banks earlier had to provide capital for them. To grow and lend more, the banks often need a higher amount of capital to set aside for loans that could go bad. With this for the government of India the burden of infusing capital has increased over the last few years. This means marking a large amount of money almost every year in the budget for many banks, at that time when there is a huge demand for funds in other sectors especially for education, health and other programmes. By reducing the number of banks to a manageable count, the government hopes that the demand for such capital infusion will be lower progressively with increased efficiencies and with more well capitalised banks. It will also help the government in focusing more on fewer banks now than in the past.

Benefits of Bank Merger

•       Reduction in cost of operation – Merged banks will enjoy economies of scale and reduction in the cost of operation. Cost saving on account of treasury operations, audits, controls, technology and management will help banks to bring the overheads down. This will result in saving and higher profits.
•      Bigger capital base - Merger leads to bigger capital base and higher liquidity and this reduces the government’s burden of recapitalizing the public sector banks time and again.
•     Improved efficiency – Consolidation helps in improving the professional standards. This helps the smaller banks to gear up to the international standards with innovative products and services with the accepted level of efficiency. As a result it minimizes the scope of inefficiency in smaller banks.
•     Larger scale of operation – This will help the banks which are geographically concentrated to expand their coverage beyond their outreach. This provides a broader geographic footprint to operate. It will thus lead to a big customer base that will help the banks to have good profitability. As a result a quicker growth can be achieved.
•       Recognition – Improved efficiency due to merger will thus help the Indian banks to gain greater recognition and higher rating in the global market.
•      Increase in strength – The size of bank after merger is expected to add strength to the merged banks. This will help them to have better business portfolio, asset quality, improved market capitalization, risk appetite and better risk management strategies. This will thus increase the strength of PSUs to face competition from the private players in the market.
•     Increased capacity to finance – Due to globalization, Indian companies have increased their business and become global in nature, hence their demand for large scale credit will also become higher.  With increased strength and efficiency of banks due to merger, the capacity of banks also enhances to lend to these larger companies and to large projects.
•       Meeting the norms – This will also help larger banks in meeting more stringent norms under the BASEL III, especially the capital adequacy ratio within time in comparison to smaller banks.
•      Risk Diversification – Merger of PSUs can diversify the risk. This is because the larger banks have a more diversified portfolio resulting in less volatility in its earnings.
•       High quality service – Post merger there will be fewer banks offering customer a wider range of quality products at a lower cost.

Demerits of Bank Merger –

•      Internal Conflicts – Various internal conflicts and disputes may arise post-merger in the area of systems and processes. This is because different banks have different ideologies, different organizational culture and people with different backgrounds which might give rise to conflicts.
•      Temporary Relief – Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in PSUs.
•      Difficulty in Technical Execution – Technical execution at the time of merger is a tedious task as different banks use different software platforms. So aligning them with the merged bank will be a tough nut to crack.
•      Shifting or Closure of ATMs and Branches – Merger will result in shifting or closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.
•     Negative impact on workforce – The merger of PSUs will create an excess workforce, which will consecutively lead to early VRS. It will also stop further hiring leading to curtailment of employment opportunities. This will worsen the unemployment situation further and may create social disturbances.
•     Difficult to manage – When the bank becomes oversized, it becomes tough to manage its functioning and in case the bank starts to fall then the entire economy is jeopardized. And when a big bank crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.

Impact of merger on different stakeholders

Employees – 

The task of reorganization of large workforce will lie in the hands of the top management. According to top officials there will be reshuffle of the administrative staffs. They will be moved to various other functions. They will be retrained before assigning any work to them. Also a voluntary retirement scheme will be offered alongside the reshuffle. This will give a chance to people to exit voluntarily who do not want to accept this change. This will vacant some post and due to which bank will get the opportunity to hire more appropriately skilled staff from the market. But this fresh hiring will be very few in number as the bank is already dealing with large workforce.

Customers –

Retail customers of the amalgamating banks are likely to get directly affected whereas customers of the anchor banks are not likely to face much change. Customers are likely to get new account number and customer ID. They will also be given new bank account numbers, IFSC code and credit/debit cards for transactions. Customer will also have to deal with the branch and ATM rationalization exercise as many branches and ATMs will be closed or shifted. Further borrowers have to deal with change in lending rates that are to be decided by the merged entity.

Shareholders –

Shareholders of all the publicly listed banks involved in the merger will be impacted. Shareholders of amalgamating banks will be allotted share of the anchor bank in a pre-decided ratio. Apart from this, the prices of the shares on the exchanges have already been impacted when the merger were announced.

Conclusion –

Consolidation will bring efficiency and synergy of operations and will ensure that Indian banking sector is capable of meeting credit demand of our growing economy. However, consolidation is a complex process and hence it is important that the banks and government handle the nitty gritty of this pivotal transformation with great care. The result of this mega merger is still a debatable issue and only the future will decide the fate of this merger exercise.

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