Increasing Non-Performing Assets (NPAs) and outstanding loans coupled with the problems of structural asset-liability mismatch and governance issues in management led to the need for structural remodelling in the banking sector. In this light, Central Government has initiated the process of reorganisation of banks in public sector. In 2019, Finance Minister Nirmala Sitaraman announced the merger of 10 Government of India undertaking banks into four mega-banks. After the merger, total number of public sector banks is set to become 12 from earlier 18.
However, government’s plan to recapitalise public sector banks could be hit badly as bad loans would increase and credit quality weaken because of the lockdown in the economy. It will depend upon the success of 20 lakh crore package to revive the economy
In India, the mergers of bank is not a new concept. In past, merger of banks have been undertaken so as to reform the banking system. The decision to merge the banks will not only fulfill the objectives of financial inclusion but will also result in better NPA and risk management. Further, the merger will reduce the dependence of Public Sector Banks (PSBs) on the government for capital since it will increase the role of internal and market resources.
Meaning of Merger
Usually Merger is a process of bringing two or more separate business entities under common ownership through a series of legal and administrative measures. the merger results into more competitiveness and provide economies of scale. Further, the wealth of a company, diversification of services and share in market is also increased. Bank merger is a process in which previously distinct banks are consolidated into one institution. When a merger occurs, an independent bank loses its charter and becomes a part of an existing bank with a unified control.
History of Bank Mergers in India
Modern banking system in India originated under the British rule. In the beginning of 19th century, British East India company founded three banks-Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843). The three banks were merged in 1921 to form the Imperial Bank of India, which upon India’s Independence, became State Bank of India in 1955. Reserve Bank of India was established in 1935. In 1969, the Indian government nationalised the 14 major private banks. In 1980, 6 more private banks were nationalised.
The idea of bank merger first emerged in 1991 when former RBI Governor M Narasimham suggested the government to merge banks into a 3-tiered structure. Later, mergers of Indian Banks were initiated following the recommendation of the Narasimham Committee which was tasked with progress review of the implementation of the banking reforms. In 2014, the PJ Nayak Panel suggested that the government should either merge or privatise state owned banks.
In 2017, five associates of State Bank of India and Bhartiya Mahila Bank were merged with SBI. This resulted in SBI being one amongst the 50 largest banks in the world. The government merged Dena Bank and Vijaya Bank with Bank of Baroda, thus, creating third largest bank by loans in the country in 2018.
With the announcement of mega merger in 2019, ten public sectors banks are set to become only four large banks. Punjab National Bank, Oriental Bank of Commerce and United Bank will be merged together. Canara and Syndicate Bank are to be merged with each other. Merger of Union Bank of India, Andhra Bank and Corporation Bank has also been announced. In addition to these mergers, Indian Bank and Allahabad Bank will also be merged.
Need for Merger of Banks
The Indian banking sector has been facing multiple challenges in recent past. The need for banking merger has arised due to the following reasons
• Accumulation of Non-Performing Assets (NPAs) have become a matter of concern for banking sector. It has impacted credit delivery of banks to a great extent.
• Twin balance sheet problem has further aggravated the deteriorating economic situation in India. Twin balance sheet problem refers to the stress on balance sheet of banks due to Non-Performing Assets (NPAs) on one hand and heavily indebted corporates on the other hand.
• The ever increasing responsibility of PSBs in providing credit facilities to agriculture, capital intensive risky sectors such as steel, cement etc and frequent loan waivers by government, further deteriorates the credit culture in India.
• Political Interference in functioning of PSBs is a matter of grave concern. It reduces the bank’s efficiency.
• Other issues like long gestation period of projects, lack of timely environment clearance for projects, lack of thorough study of the business before disbursing loans and poor debt recovery architecture in the country also aggravate the problems of PSBs.
These issues needs to be addressed through strengthening of the capital base of banks. This can be achieved through mergers and acquisitions. Merger of banks is one of the remedy for the ills of Indian Banking System.
Process of Bank Mergers
Bank consolidation procedures are governed by the Banking Regulation Act, 1949. Any two PSBs can initiate merger discussions. However, the merger scheme is finalised by the government in consultation with RBI pending Parliament’s approval. Parliament has the right to modify or reject the merger scheme. Parliamentary approval is also necessary for merger of public sector bank and a private bank
Advantages of Bank Mergers
The number of PSBs in India is high. These all banks usually cater the needs of customers belonging to similar domain and area. More often, this results in unnecessary and irrational competitive environment which ultimately affects the economy. India needs the merger of banks in order to become a global leader. Bank mergers have following advantages
• Mergers in banking sector will help in achieving the economies of scale and scope.
• Merger of two weak banks with a strong bank will enable a faster and less costly way to improve the profitability.
• The consolidation of banks through merger will allow big banks to enter the global financial market and to survive in the high risk field of competition with foreign giants.
• As the size increases, the efficiency of the system is also set to increase and the large scale of operation will enable the banks to bring down the operative cost substantially.
Challenges in Merger
The merger might also pose some challenges. Some of the difficulties are a follows as
• Confusion and lack of clarity among employees.
• With considerable number of positions being abolished due to merger, there are chances of employees becoming jobless.
• With staff from participating banks coming together, there will be surplus staff at many branches.
•Integration of technology platforms and managing HR and cultural values of participating banks remains a critical issue.
• With the increase in the number of bank branches, it will be difficult for the head office of the merged entity to regulate and monitor all activities.
Mergers are important for the consolidation and expansion purposes. They are also crucial for economy as they are most of the times successful in saving weak banks which fail in meeting expectations. There are few other measures by which banking system in India can be strengthened.
The Union government on 24th June, 2020 approved to bring 1482 urban cooperative and 58 multi-state Cooperative Banks under the supervision of RBI. However, merger also creates variety of problems which can cause great damage if the process of merger is not carried out cautiously. If merging is required, it must be carried out in a manner which leads to an environment of trust and agreement among the people of both the organisations. If people, work culture and vision are blended together nicely, merging will definitely have synergic effects and create a win-win situation for all.
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