Essay on Merger of Banks - Is Bigger Always Better ?

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Merger is a process of bringing two or more separate business entities under common ownership through a series of legal and administrative measures. Bank merger is an event 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 one headquarters and is driven by a unified control. Mergers in Indian banking have been initiated through the recommendations of Narasimhan Committee II.

The issue has been in the news recently as the Union Cabinet approved the merger of Vijaya Bank and Dena Bank with Bank of Baroda (BoB). Following the merger of these state-owned banks, BoB will become the third largest bank in terms of assets in India.

Post liberalization, there have been several mergers such as merger of New Bank of India with Punjab National Bank, Bharat Overseas Bank with Indian Overseas Bank, Times Bank with HDFC and various subsidiaries of State Bank of India with the parent bank. The characteristics of each of these mergers were different from the others.

Indian banks are facing tough competition from their international counterparts, as the foreign banks with huge capital base are able to offer loans to borrowers at attractive rates that make the Indian banks vulnerable to economic shock and consequent instability. These issues need to be addressed through strengthening of the capital base of such banks, which is possible only through mergers and acquisitions.

Merger of banks is one of the solutions for the ills of Indian Public Sector Banks (PSBs). Before further mergers, the government has to work on other issues faced by the PSBs which are responsible for the increasing Non-Performing Assets (NPAs) and inefficiency. Some of these issues are political interference in appointments of higher officials in PSBs, the ever increasing responsibility of PSBs in providing credit facilities to agriculture; capital intensive risky sectors such as steel, cement etc. frequent loan waivers by government, all of which deteriorates the credit culture in India. Other hidden issues such as long gestation period of projects, lack of timely environmental clearances 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.

Therefore, government has to resolve these issues to make PSBs financially more efficient because, if a big bank fails after merger then it will be disastrous for the country's economy, just as it happened in the USA at the time of the 2008-09 financial recession.

To enter the global financial market and to survive in the high-risk field of competition with foreign banking giants, Indian banking industry badly needs consolidation. The most commonly adopted method of consolidation of banks is merger. Merger of two weak banks or merger of a weak bank with a strong bank is said to be the faster and less costly way to improve profitability. Also, it is a better idea to have one big, healthy, strong and productive bank than to have several ailing and laggard banks. One more major motive behind the mergers in banking industry is to achieve economies of scale and scope. As the size increases, the efficiency of the system also increases because the large operations enable the banks to bring down the operative cost substantially, which in turn facilitates the banks to offer better rates to its customers. Along with diversified activities, mergers enable the banks to extend the business to various segments at many locations across the country and the globe. Hence, the risks are spread across various regions and segments, which protect the banks from an adverse business cycle or an unexpected financial crisis.

Some difficulties are encountered in a merger. For instance, there is confusion and lack of clarity among employees. Despite new positions being created, a considerable number of positions are abolished with the merger, resulting in a number of people becoming jobless. Besides, with staff from all participating banks coming under the same banner, there will be surplus staff at many branches, which will lead to transfers to previously understaffed branches, usually remote locations. This can sometimes trigger widespread discontent.

The number of bank branches certainly increased after a merger, which makes it difficult for the head office of the merged entity to regulate and monitor all activities. Besides, the different workplace cultures coming into contact are bound to cause some clashes in the beginning before they begin to adapt. Further, bank merger brings the best and the worst of the merged banks together, which means weaknesses of the banks will also initially get into the system before they can be weeded out.

There is always a risk of isolating the customer base immediately after a merger. First of all, there is the fear about the security of money deposited, especially in a time when cybercrimes are rampant. Secondly, banking policies sometime change, along with technological platforms and that may not go down well with the customer base, especially with long term and elderly customers. Sometimes such customers react emotionally to such changes and banks must be prepared to lose some customers after such a transition.

The idea of bank mergers has been around since at least 1991, when former Reserve Bank of India (RBI) Governor M Narasimham recommended that the government merge banks into a three-tiered structure, with three large banks with an international presence at the top.

In 2014, the PJ Nayak panel suggested that the government either merge or privatise state-owned banks. The government hopes that state-owned banks will achieve economies of scale and operational efficiency, while managing risks in a better way after merging. Mission Indradhanush for banks is a seven-pronged plan launched by Government of India to resolve issues faced by Public Sector Banks. Many of the measures taken under this mission were suggested by the PJ Nayak Committee on banking sector reforms.

Bank mergers and acquisitions are complex procedures with the possibility of extraordinary payoffs. Hence, it is important that the banks and government handle the nitty gritties of this pivotal transformation with care. All the benefits and dangers must be weighed properly for a successful merger or acquisition.

The merger of State Bank of Saurashtra and State Bank of Indore with State Bank of India had unveiled the merger process among public sector banks and more are following. It is time to look for synergy driven mergers. Banks can reap the benefit of consolidation only when the issues such as redeployment of surplus staff, integration of technology platforms, systems and procedures and cultural issues are addressed suitably.

Difficult Words with Meanings :

• Consolidated brought together
• Charter official document permitting a bank to start business as a bank
• Liberalisation financial and licensing changes made in India starting in 1991
• Parent original
• Addressed solved
• Ills problems
• Non-performing assets class of loans or advances that are in default or in arrears
• Capital intensive requiring a large amount of money
• Credit culture sum of the policies, practices and experiences in giving credit or loans
• Gestation time to completion from the start
• Debt recovery architecture legal process required to recover debts which are unpaid
• Laggard falling behind others
• Economies of scale having in costs gained by having a large number of customers
• Discontent unhappiness
• Weeded out removed
• Isolating making unhappy
• Synergy having similar or same goals

shared by Nisheeta Mirchandani

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