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

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.

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.