Banks Merger in India: Is it good for Indian Economy?

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Updated on April 02, 2020

 

The largest ever merger in the public sector banking space in India has taken place on Wednesday April 1, 2020  when six Public Sector Banks were merged into four large banks in a bid to make them globally competitive. Customers, including depositors of the merging banks, will now be treated as customers of the banks in which they have merged.

 

Following the consolidation, there are now seven large public sector banks (PSBs), and five smaller ones. There were as many as 27 PSBs in 2017. The total number of public sector banks in the country have come down from 18 to 12 from April 1, 2020.

 

Merger and Acquisition of Banks in India and its effects has become a favourite topic of Group Discussion in FMS Delhi, IIMs, MDI, XLRI among others. Apart from other B-schools, FMS Delhi also placed this topic in the final selection round in 2018. Below is shared the solved write up on the topic.

 

The Banks’ merger dated April 1, 2020 has resulted in the creation of seven large PSBs with scale and national reach, with each amalgamated entity having business of over Rs 8 lakh crore and it has helped to create banks with scale comparable to global banks and capable of competing effectively in India and globally.

 

As per the mega consolidation plan, Oriental Bank of Commerce and United Bank of India have merged into Punjab National Bank (PNB); Syndicate Bank into Canara Bank; Andhra Bank and Corporation Bank into Union Bank of India; and Allahabad Bank into Indian Bank.

 

The exercise assumes significance as it has taken place at a time when the entire country is under the grip of COVID-19 outbreak. It has triggered 21-day lockdown to contain the spread of the deadly virus. Experts are of the opinion that merger at this point of time may not be remain a very smooth and seamless transition. However, heads of the anchor banks have exuded confidence and do not find any problem as the process has gone as per the plan with certain modification in implementation.

 

The four anchor banks -- PNB, Canara Bank, Union Bank and Indian Bank -- have postponed some part of the implementation and processes due to the lockdown for example like loan process which were proposed to be followed earlier.

 

In addition, consolidation would also provide impetus to merged entities by increasing their ability to support larger ticket-size lending and have competitive operations by virtue of greater financial capacity.

 

Last year, Dena Bank and Vijaya Bank were merged with Bank of Baroda. Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the public sector bank. These were State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore and State Bank of Hyderabad effective April 2017. 

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Punjab National Bank becomes 2nd Largest Bank: Oriental Bank of Commerce and United Bank merger into Punjab National Bank has created a bank with ₹17.95 lakh crore business and 11,437 branches.

 

4th Largest Bank – Merger of Canara Bank & Syndicate Bank: The merger of Syndicate Bank with Canara Bank has created the fourth largest public sector bank with ₹15.20 lakh crore business and a branch network of 10,324.

 

5th Largest Bank: Merger of Andhra Bank and Corporation Bank with Union Bank of India has created India's fifth largest public sector bank with ₹14.59 lakh crore business and 9,609 branches.

 

7th Largest Bank: The merger of Allahabad Bank with Indian Bank has created the seventh largest public sector bank with ₹8.08 lakh crore business having strong branch networks in the south, north and east of the country

 

India has 12 Banks Now
The biggest overhaul in public sector banks has left India with only 12 banks now instead of 18 before the Merger. According to the Government this decision of making large entities will make the Indian banks capable of meeting the higher funding needs of the economy and will help in acquiring the global scale.

Banking order (Largest to Smallest)
Business in Lakhs of crore Rupees
Market Share
State Bank of India
52.1
22.5
PNB+OBC+United Bank
17.9
 7.7
HDFC Bank
17.5
 7.6
Bank of Baroda
16.1
 7
Canara + Syndicate Bank
15.2
 6.6
Union+Andhta+Corporation Bank
14.6
 6.3
ICICI Bank
12.7
 5.5
Axis Bank
10.6
 4.6
Bank of India
  9.0
 3.9
Indian + Allahabad Bank
  8.1
 3.5

Source: ToI dt Aug 31, 2019

 

Fruitful Result of Banks’ Merger
As per studies conducted, most of the mergers done in the past, have proved to be an overall success for the weaker banks although there are no concrete parameters to verify this observation. Hence going by the track record merger and acquisition in Indian banking have been fruitful for the Indian Economy.

 

Banks’ Merger: Background
Announcing the mega plan of Banks’ merger on Friday August 30, 2019 with an aim to have financially strong Public sector banks in India, the Finance Minister of India Nirmala Sitharaman had outlined the Government’s plan to merge 10 public sector banks into four large banks. After the mergers, there will be 12 public sector banks in India, including State Bank of India and Bank of Baroda. The merger is expected to create fewer and stronger global-sized Banks to boost economic growth.

 

On March 4, 2020, the Finance Minister announced the final date of merger as April 1, 2020. According to her, the exercise of consolidation of 10 public sector banks (PSB) into four is on course and the merger will come into effect from April 1, 2020. The Union Cabinet has given a go-ahead for the merger
 

It is but the desire for growth that acts as the fuel not only for an entrepreneur but also for every professional or corporation. This deep desire for growth in terms of customer base, balance sheet and profit has led the organizations engaging in mergers and acquisitions to move ahead and onwards in synergy.

 

The Indian Banks too did not stay aloof from this wave of mergers and acquisitions (M&A). Initially banks were merged to save non-performing banks or non efficient banks but as time evolved the system too evolved. In the recent times mergers and acquisitions have also been made on grounds of business growth, profitability and organizational restructure.

 

History of Mergers in Indian Banking
Mergers of banks began in India in the 1960s in order to bail out the weaker banks and protect the customer interests. After that in post liberalization period the quest to create an Indian bank that would be in the league of global giants had been continuing since 1990. Moving on the path of creating one of the largest global banks, the government had approved the merger of five associate banks with SBI in February 2017. Later in March, the Cabinet approved merger of BMB also.

 

Merger & Nationalization during the period from 1961-1969: The period is called pre-nationalization period because in 1969 the government nationalized 14 private banks. As many as 46 mergers took place mostly of private sector banks in order to revive the poorly performing banks which proved to be quite a successful move for the underperforming banks.

 

The period from 1969-1991: The period was called post-nationalization period. It saw six private banks being nationalized in 1980. In this period 13 mergers took place mostly between public and private sector banks.

 

The post liberalization period, which stretches from 1991-2015, saw major economic reforms initiated by Government of India. Many new policies were framed. Greater FDI and foreign investment was allowed which saw resurgence in Indian Banking. As many as 22 mergers took place - some to save weaker banks and some for the sake of synergic business growth.

 

Bank Mergers (1993-2004): The merger of Oriental Bank of Commerce with Global Trust bank in 2004 saved the latter after its net worth had wiped off and also handed OBC a million depositors and a decent market in South India. Mergers of Punjab National Bank (PNB) with the then eroded New Bank of India (NBI) in 1993-94 and that of Benaras State bank Ltd with Bank of Baroda in 2002 also proved to be life saving for the weaker bank. 

 

Bank Mergers & Consolidation 2008-2010: SBI first merged State Bank of Saurashtra with itself in 2008. Two years later in 2010, State Bank of Indore was merged with it. The board of SBI earlier approved the merger plan under which SBBJ shareholders got 28 shares of SBI (Re.1 each) for every 10 shares (Rs10 each) held. Similarly, SBM and SBT shareholders got 22 shares of SBI for every 10 shares.

 

Post the merger, the SBI was in the process to rationalize its branch network by relocating some of the branches to maximize reach. This, according to SBI helped the bank optimize its operations and improve profitability. SBI had approved separate schemes of acquisition for State Bank of Patiala and State Bank of Hyderabad. There was no proposal for any share swap or cash outgo as they were wholly-owned by the SBI.

 

Consolidation of Banks (2015-2017) – This phase saw five associates of SBI and Bhartiya Mahila Bank getting merged in SBI. The vision was to have strong banks rather than having large number of banks. This resulted in SBI being one amongst the 50 largest banks in the world.

 

Union Cabinet decided to merge all the remaining five associate banks of State Bank Group with State Bank of India in 2017. After the Parliament passed the merger Bill, the subsidiary banks  ceased to exist and the State Bank of India (Subsidiary Banks) Act, 1959 and the State Bank of Hyderabad Act, 1956 were repealed. 

 

Five associates and the Bharatiya Mahila Bank became the part of State Bank of India (SBI) beginning April 1, 2017. This has placed State Bank of India among the top 50 banks in the world. The five associate banks that were merged into State Bank of India were- State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT). The other two Associate Banks namely State Bank of Indore and State Bank of Saurashtra had already been merged with State Bank of India. After the merger, the total customer base of SBI increased to 37 crore with a branch network of around 24,000 and around 60,000 ATMs across the country.  

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Merger of Banks 2018- The government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country in 2018.

 

Mega Merger of Banks 2019- With the mega merger announce on August 30, 2019, ten public sectors banks are now reduced into four large banks. The four sets of banks that have been  created out of Canara Bank and Syndicate Bank merger; Indian Bank and Allahabad Bank merger; Union Bank of India, Andhra Bank and Corporation Bank merger; and the bank to be created after merger of Punjab National Bank, Oriental Bank of Commerce and United Bank of India.

 

Six Banks Untouched: The mega merger has left untouched six other banks out of which two are national banks and the four have regional focus. The untouched banks are Bank of India, Central Bank of India, Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab & Sind Bank which will continue as separate entities as before.

 

Rs. 55000 Crore Recapitalization Plan With Mega Merger
The Finance Minister of India has also announced Rs.55,000 Crore recapitalization plan for the banks formed after merger. Besides, recapitalization will also be infused to the six other banks which are not the part of this merger.

Banking Recapitalization (Highest to Lowest)
Amount of Recapitalization announced (Rs. in Crores)
Punjab National Bank
16,000
Union Bank of India
11,700
Bank of Baroda
  7,000
Canara Bank
  6,500
Indian Overseas Bank
  3,800
Central Bank of India
  3,300
UCO Bank
  2,100
United Bank of India
  1,600
Punjab & Sind Bank
     750

Source: ToI dt Aug 31, 2019

 

Advantages of Bank Mergers

  • Larger Bank is capable of facing global competition
  • The merger will reduce the cost of banking operation
  • Merger will result in better NPA and Risk management
  • Merger will help in improving the professional standards  
  • Decisions on High Lending requirements can be taken promptly
  • For the bank, retaining and enhancing its identity as a larger bank becomes easier. After the merger, benefits of merger are enormous and the biggest is generation of a brand new customer base, empowering of business, increased hold in the market share, opportunity of technology upgrade. Thus overall it proves to be beneficial to the overall Economy 
  • Provides better efficiency ratio for business operations as well as banking operations which is beneficial for the economy
  • Minimization of overall risk is there due to mergers and acquisitions which is always good from the business point of view
  • Leads to increase in profitability and helps in raising the standard of living which is absolutely crucial for a growing economy like India
  • Chances of survival of underperforming banks increases hence customer trust remains intact which is vital for the Economy. The weaker bank gets merged into stronger one and gets the benefit of large scale operations
  • The objectives of financial inclusion and broadening the geographical reach of banking can be achieved better with the merger of large public sector banks and leveraging on their expertise.
  • With the large scale expertise available in every sphere of banking operation, the scale of inefficiency which is more in case of small banks, will be minimized
  • The merger will help the geographically concentrated regionally present banks to expand their coverage
  • Larger size of the Bank will help the merged banks to offer more products and services and help in integrated growth of the Banking sector
  • A larger bank can manage its short and long term liquidity better. There will not be any need for overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF)
  • In the global market, the Indian banks will gain greater recognition and higher rating
  • With a larger capital base and higher liquidity, the burden on the central government to recapitalize the public sector banks again and again will come down substantially
  • Multiple posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in substantial financial savings
  • Bank staff will be under single umbrella in regard to their service conditions and wages instead of facing disparities.

Problems Arising due to Mergers & Acquisitions in Indian Banking
Most of the problems arising due to mergers and acquisitions are more emotional and social in nature than technical or managerial. The major problems which arise are:-

  • Compliance needed in every decision which might not be favorable as thinking perspectives and risk taking abilities of different organizations are different. It leads to friction and rift which, if not managed well may lead to the downfall of the organization as a whole.
  • Banks are merged only on papers. Their people and culture are difficult to change. It is a recipe for disaster as it leads to poor culture fit not ideal for the organization or the economy.
  • Risk of failure increases if the executives are not committed enough in bringing the merger platforms together for the merging and taking over bank. Such failure may prove brutal for the Economy.
  • Impact of customers on banking merger or acquisition is often quite emotional. If customer perception is not managed with frequent and careful communication it may lead to loss of business which is never good for the Economy.
  • Managing Director of Federal Bank, V.A. Joseph is of the view that Co-existence of the big, medium and regional banks would be preferable in the present scenario. According to him most acquisitions in India were borne out of compulsions and over 90 per cent of past acquisitions had failed to achieve the objectives.
  • Many banks focus on regional banking requirements. With the merger the very purpose of establishing the bank to cater to regional needs is lost.
  • Large bank size may create more problems also. Large global banks had collapsed during the global financial crisis while smaller ones had survived the crisis due to their strengths and focus on micro aspects.
  • With the merger, the weaknesses of the small banks are also transferred to the bigger bank.
  • So far small scale losses and recapitalization could revive the capital base of small banks. Now if the giant shaped bank books huge loss or incurs high NPAs as it had been incurring, it will be difficult for the entire banking system to sustain.

Important But to Remain under Watch
Mergers are important for the consolidation and expansion purposes that is why in today’s scenario many private sector banks are genuinely interested in mergers and acquisition. They are also crucial for Economy as they are most of the times successful in saving weak banks which fail in meeting expectations.

 

Merger creates variety of problems which can cause great damage if the process of merging is not executed properly.

 

If merging is needed it must be executed in a manner which leads to an environment of trust and agreement among the people of both the organizations. If people, work culture and vision are blended together nicely, merging will definitely have synergic effects and create a win-win situation. 

 

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