Bank Mergers

Bank Mergers

IN NEWS

The government proposed the amalgamation of state-owned Bank of Baroda (BoB), Dena Bank and Vijaya Bank to create India’s third-largest bank. The move is part of the reforms initiated in the public sector banking segment.

The decision was taken at a meeting of a ministerial panel (called Alternative Mechanism), headed by Finance Minister Arun Jaitley, that oversees merger proposals of state-owned banks.

BANK CONSOLIDATION

Bank consolidation occurs when two or more banks become one bank. Bank consolidation can lead to expansion for the newly merged institution. Banks consolidate for multiple reasons, including to mitigate competition, gain capital power both domestically and internationally, to compete with larger banking institutions or to expand the services that the newly merged bank can provide both internally and geographically by decreasing overall operating costs.

NEED FOR BANK CONSOLIDATION

1. Economies of scale: Assocham Survey has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates. Combined assets of top ten banks constitute less than 60 per cent of the GDP unlike the banking system of European economies, where even after the global financial turmoil, assets of only top five banks has grown to four times of GDP.
2. Indian Banks are too small: Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, the State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital – a core measure of a bank’s financial strength that consists largely of shareholders’ capital.
3. Many experts in Banking field feels that hampered by the fragmented nature of the banking industry, Indian banks are not able to compete globally in terms of fund mobilisation, credit disbursal, investment and rendering of financial services. The balance sheets of top 10 Indian banks suggest the greater scope of consolidation to reap the benefits of large sized globally competitive Indian banks
4. Merger will increase Capital efficiency: Consolidation will also increase capital efficiency. Merged entity will have more leg room to raise capital.
5. Would decrease NPA: At a time when NPAs are high, and banks are putting more effort in recovery, the ability to recover by smaller number of banks will be higher though a individual bank’s exposure may go up.

DEMERITS.

1. Merger will affect regional focus.
2. Immediate negative impact of merger would be from pension liability provisions (due to different employee benefit structures) and harmonisation of accounting policies for bad loans recognistion.
3. Mergers will result in shifting and closure of many ATMs, Branches and Controlling offices, as it is not economical to keep so many banks concentrated in several pockets especially in urban and metropolitan centres
4. Merger will result in immediate job losses. This will worsen the unemployment situation further and may create law and order situation and social disturbances
5. New power centres will emerge in the changed environment.
6. Merger will result in clash of different organizational cultures
7. The weaknesses of the small banks may get transferred to the bigger banks
8. When a big bank books huge loss, there will be a big jolt in the entire banking system and its repercussions will be felt on every stakeholder.
9. Presently, India needs more banking competition rather than more banking consolidation. India needs more banks rather than fewer banks.

EARLIER BANK MERGERS IN INDIA

This is not the first time that the idea of merging the Public Sector Banks has gained momentum.

In 1991 report on banking sectors, M. Narasimham, a former Reserve Bank of India governor, had recommended mergers to form a three-tier structure with three large banks with international presence at the top, eight to 10 national banks at tier two, and a large number of regional and local banks at the bottom.

Further  P.J. Nayak Committee had also suggested that state-run banks should either be merged or privatized.

The SBI first merged State Bank of Saurashtra with itself in 2008.

List of important Mergers of Banks in India

WAY AHEAD

Merger is a good idea. However, this should be carried out with right banks for the right reasons. Merger is also tricky given the huge challenges banks face, including the bad loan problem that has plunged many public sector banks in an unprecedented crisis. Since mergers are also about people, a huge amount of planning would be required to make the consolidation process smoother.