Merger of Banks in India – Can be positive or Negative, Types, Effect and Conclusion

By Jyoti Verma

mersger of bank in india

 

The merger of banks – Can be positive or negative – On August 30, 2019 The Finance Minister Sitharaman had announced the merger of 10 Public Sector Banks into four. This merger was approved by the union cabinet on 4 March 2020 which would be effective from April 1, 2020. Now the number of Public Sector Banks would be reduced to 12 from that of 27 as was in the year 2017.

To decide whether Merging of banks is good or bad let’s understand first what a merger is?
Meaning of Merger

Merger means combining two companies into a single larger one to shape a new identity.

Combination of two companies involves a transfer of ownership, either through a stock exchange or a cash payment between the two companies. Thus, practically both companies surrender their stock and issue new stock, share their information related to debts, resources, technology etc. as a new company

 

What happens in a Merger?
In a Merger companies are benefited in combined business operations and ventures. Together they are able to increase shareholder value and cater the needs more effectively.
The commonly looked after objectives are:

  • To meet Tax purposes
  • To have effective Diversification policies to reduce financial risks
  • Acquiring Resources
  • Incentives for managers to bring motivation factor for them
  • To increase and enhance the wealth of their shareholders
  • Thus, Mergers are done to look after the Financial Perspective to create competent and valuable organizations, both for shareholders and for the consumers.

 

We can also say that the merger helps in reducing the limitations and get a cutthroat competitive edge in the market.

Merger can happen in two ways:

First is Horizontal Merger:
It occurs when two businesses in the same industry combine into one. It works on a 1+1 formula where two companies work under the same management.
This type of merger is done to reduce costs and increase diversification.It increases market share and reduces competition in the industry.This type of combination can cause anti-trust issues depending on the Industry. For instance, GM and Ford may not be allowed to merge because of anti-trust laws.
This can be difficult to achieve because of integration challenges of varied work cultures.

Second is Vertical Merger

Vertical merger occurs when two businesses in the same value chain or supply chain merge. For instance: A Hamburger restaurant might merge with a Cow farm.
In this type of merger two companies deal with different things and cater to the needs like one manufactures and the other deals with supplies

 

Merger of Banks – Good or Bad?

The union ministry of finance merged three public sector banks: Bank of Baroda, Dena Bank and Vijaya Bank.

  1. Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second largest leader
  2. Canara Bank and Syndicate Bank will merge.
  3. Union bank of India will amalgamate with Andhra Bank and Corporation Bank.
  4. Indian Bank will merge with Allahabad Bank

But the decision to merge the bank has raised serious concerns

 

Background

The idea of bank consolidation was around since 1991, when former RBI governor M. Narsimha had suggested the government to merge banks in to a 3 tiered structure, with three large banks with a global presence at the top, 8 to10 national banks at term 2 and a large number of regional and local banks at the bottom.

  • In 2014, PJ Nayak Patel had also recommended that the government should either merge or privatise Public Sector Banks (PSBs).

 

Why Banks Merge?

  • It will be easier for the government to keep a check over the enlarged institution.
  • The financial system of the enlarged institution will be more profitable and protected.
  • To develop the capacities to meet the demand for loan and sustain economic growth

 

The procedure of a Bank Merger?

  • Bank consolidated procedures are provided under the Banking Regulation Act,1949.
  • Two banks can initiate dialogue and discussion to finalize their schemes with the government in consultation with RBI .
  • The proposal must be placed in Parliament for approval
  • Parliament has the right to modify ,accept or reject the Merger scheme

 

Significance of PSBs Merger? (Pros)

It reduces the competitors and leads to greater concentration of payment and settlement flows.Operational risks are decreased.

The concerns and challenges regarding the Merger

Weaker banks might affect the working. The varied work cultures might act as an hindrance to the success of the project, staff integration, to meet different expectations of the task forces, resistance of employees union and their fears of losing jobs, relocation issues because of enlarged structures.

 

Merger of Banks Good or Bad?

  • The mergers of Banks will lead to a higher scale of operations, resulting in improved efficiency and lower costs.

 

The Advantages of Merging Banks

  • It reduces the cost of operation.
  • It helps to improve the professional standard.
  • Provides the better efficiency ratio for operations as well as banking operations which is beneficial for the economy
  • Multiple posts get abolished, resulting in substantial financial savings Banking mergers improve risk management.
  • The merger helps the geographically concentrated regionally present banks to expand their coverage.
  • NPA is beneficial.
  • Reduced financial risk.
  • Increased opportunities.
  • Small fee.
  • Credibility.
  • Availability of cheap loans.
  • Economies of large scale.
  • Development in rural areas.
  • Entry in the Global market.
  • Growth and expansion.
  • Utilization of excess cash.
  • Improves customer base
  • Helps to face competition.
  • Increase in market share.
  • Increases goodwill.
  • Research and development
  • Less documents.
  • Tax benefits.
  • After these mergers, the lending capacity of the Public Sector Banks will increase and their balance sheet would also be strong.
  •  These big banks would also be able to compete globally and increase their operational efficiency by reducing their cost of lending.
  •  India needs investment in huge quantities to turn India into a 5 trillion economy. If banks have sufficient money to fund big projects then the economic development of the country would speed up.
  •  The merger would help in better management of banking capital. 
  • So after the merger of the 10 PSBs in the four major banks seems to be a good step in ensuring the availability of the money for the investment purpose in the country. 

 

Disadvantage of Merging Banks

  • Acquiring banks have to bear the burden of weaker banks.
  • Very challenging to manage the people and culture of different banks.
  • Also destroy the idea of decentralization as many banks have a regional audience to cater
  • Large banks are more vulnerable to global economic crises.
  • Mergers may make it difficult for private banks to gain faster market share as most anchor banks are large.
  • Chances of Bank going Bankrupt.
  • No past experience
  • Risk of fraud and robberies.
  • Risk of public debt.
  • Strict assessment.
  • Complications.
  • Governance issues.
  • Financial aspects.
  • Need of collateral.

 

How will the general public be influenced by this merger?

  • Cheques books, credit cards might change
  • Bank details might change to report to the organizations
  • Interest rates might differ
  • A plus point is that the branch network would become larger so access to bank will be easier

 

Conclusion

Mergers are important

  • For the expansion purposes.
  • For economic growth purposes.

Merger helps in saving the weak banks for credibility

 

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