Merger Of Banks

  • The merger of 10 public sector undertaking banks into four came into effect from 1st April, 2020.

Background

  • In the biggest consolidation exercise in the banking space, the government in August 2019 had announced mergers of public sector banks, a move aimed at making state-owned lenders global sized banks.
  • The Cabinet Committee on Economic Affairs (CCEA) approved consolidation of 10 state-run banks into four on 4th march, 2020.
  • It is to be noted that in 2019, 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 State Bank of India.

Key Points

  • The banks are being amalgamated with a larger bank, referred to as the anchor bank.
  • Account holders of merging banks will now be treated as customers of the anchor banks
  • Oriental Bank of Commerce (OBC) and United Bank of India will be merged into Punjab National Bank (PNB). After the merger, these together will form the second-largest public sector bank (PSB) in the country, after State Bank of India (SBI).
  • Syndicate Bank will be merged into Canara Bank, which will make it the fourth-largest public sector lender.
  • Indian Bank will be merged with Allahabad Bank.
  • Union Bank of India will be merged with Andhra Bank and Corporation Bank.
  • Customers, including depositors of merging banks will be treated as customers of the banks in which these banks have been merged with effect from 1st April, 2020.
  • For multiple bank accounts with both merging as well as anchor banks, there might be a single customer ID now
  • There will be no change in the existing interest rates and fixed deposits after the merger. It will just be transferred to the anchor bank.
  • New cheque books will be issued by the anchor banks and the existing ones will no longer be effective.
  • After the merger, there will be 12 PSUs - six merged banks and six independent public sector banks.

Six Merged Banks

  • SBI, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Bank.

Six Independent Banks

  • Indian Overseas Bank, Uco Bank, Bank of Maharashtra, Punjab and Sind Bank, Bank of India, Central Bank of India.

Impact

Smooth Functioning & Better Delivery of Services

  • The mega consolidation would help create banks with scale comparable to global banks and capable of competing effectively in India and globally.
  • Greater scale and synergy through consolidation would lead to cost benefits which should enable the PSBs enhance their competitiveness and positively impact the Indian banking system.
  • In addition, consolidation would also provide impetus to amalgamated entities by increasing their ability to support larger ticket-size lending and have competitive operations by virtue of greater financial capacity.

Boost to Financial Inclusion

  • The adoption of best practices across amalgamating entities would enable the banks improve their cost efficiency and risk management, and also boost the goal of financial inclusion through wider reach.

Competitive Advantage

  • Further, with the adoption of technologies across the amalgamating banks, access to a wider talent pool, and a larger database, PSBs would be in a position to gain competitive advantage by leveraging analytics in a rapidly digitalising banking landscape.

Associated Challenges

Integration Challenge

  • The main hurdle will be to the smooth process of integration. All banks have their own importance in terms of origin, growth, expansion and geographical , and have been contributing to economic development in their own way.
  • Merger of banks will take away their identity and customers will find it difficult to deal with the new bank.
  • It might create a lot of problems for employees in inter-se seniority, transfers to their place of choice, etc. This will pose a challenge to the unions dealing with these problems.

Loss of Job

  • Branch rationalisation and branch closures are bound to happen on account of mergers, which would lead to job losses and back room operations may reduce face to face interaction of the service providers with the customers.

Better Service Delivery Challenge

  • By merging branches in a certain locality, the number of customers to be taken care of by the merged branch will double or treble. Hence, customer attention and quality of customer service are bound to be affected adversely. When every customer wants better service, the branch will face a big hurdle in this regard.
  • Further, there are many welfare schemes, fringe benefits and other schemes that vary from bank to bank. Mergers will impact these benefits and schemes and unionists have to address these issues to harmonise these benefits.
  • Mergers will totally divert the attention of the banks from loan recovery and it is bound to take a back sea

High-Cost Model

  • The merged entity would not get any benefit of efficiencies. The PSBs have a very high-cost structure. The biggest challenge in PSB merger is to cut costs, bring efficiencies, improve profit per branch and profit per employee.

High Cost of Funds

  • The cost of funds plays a very important role in the competitive banking landscape. The weak entities that are merging tend to have a higher cost of funds.
  • While the private banks are using the digitisation and also digital modes to raise deposits and target new customers, the PSBs have this challenge of reducing the cost of the deposit.
  • At the same time, they have to deploy their resources to high yielding assets to earn high interest.

Way Forward

  • With the introduction of financial service convergence and competitions from outside and within, it is quite justifiable that to bring a sound transparent, efficient, and effective and culture friendly banking practices should be on the anvil of the government as well as policy makers.
  • The legal implications combined with the ethical and governance issues need to be redefined very soon so that the positive impact of mergers may be ensured.
  • Mergers strategies should be designed to improve the financial and operational soundness of existing small and capital needy banks and these should not be focused merely to gut the beautiful entities.

Source : Civil Services Chronicle Online, April, 2020