MERGERS IN INDIAN BANKING

INDUSTRY
BANKING ASSIGNNMENT-II

AKASH BODHANI
2017194
Introduction
The government is working on a consolidation plan for public sector banks, in
order to create a three-tier structure. The aim behind consolidation is to
increase the risk-taking ability of the banks
According to RBI Governor Dr. Urjit Patel, the Indian banking system could be
better off if some public sector banks are consolidated to have fewer but
healthier entities, as it would help in dealing with the problem of stressed assets
FIG 1-Banking Structure in India

Last Year five associate banks of SBI have been merged with their parent bank.
This resulted in SBI being listed out in top 50 banks globally. According to the
financial report of SBI, The number of branches increased from 16,500 to 21,500
and assets jumped from about 21.50 lakh crore to 28.25 lakh crore. However,
the merged entity was plagued with a bigger problem of Non-Performing Assets.
Pros for Banks
 The economy of scale and reduction in the cost of doing business
After the merger of the bank, there will be efficiency in the operation of the
banks as there will be a reduction in the number of branches in the same area
hence the high rental cost can be saved, also many ATM nearby can reduce in
the same area

 Rationalizing of branches and workforce

For the same purpose, banks can remove the unnecessary high post staff, which
will reduce the operating cost of bank

 Risk taking the ability of the banks will increase.

With a big chunk of monetary power coming into hands of these banks the risk,
taking capability of the bank will increase. They can lend large loans to big
industries and corporates for which now the approach of foreign banks. For
example, at the time of spectrum allocation to telecom or at the time of big
acquisition Indian corporates approach foreign banks as no Indian bank is in such
position to give such big loan. If Indian banks will give such big loans it will be of
great economic benefit for banks as well as the economy of the country

 Variety of service offerings

An optimum size would help PSBs offer more and more products and services
benefitting the customers. This will help in the overall growth of the level of
satisfaction of customers

 Global standing
In the global market, the Indian banks will gain greater recognition. as before
the merger of SBI no Indian bank was in the list of top 50 big banks of the world,
this will help us to get enhanced ratings from different rating agencies such as
Moody ’s, S&P etc.

 The volume of inter-bank transactions

The volume of inter-bank transactions will come down considerably cutting the
clearance and reconciliation time. As in the time of emergency, banks have to
take overnight loans, which also cost them some interest which will be vanished
too.

 Employee welfare
Bargaining power of the bank staff increases and they may look forward to
better wages and service conditions in the future. The wide disparities between
the staff of various banks in their service conditions and monetary benefits will
narrow down.

Pros for Government

 Basel III Norms
This will help in meeting more stringent norms under Basel-III, especially Capital
Adequacy Ratio.

 Reduction of the pressure of recapitalization

The burden of the central government to recapitalize the public sector banks
will come down as large banks will be in a state of funding itself in bad times also
they can raise money from the public

 Regulatory ease
From the regulatory perspective, monitoring and controlling less number of
banks will be easier after mergers.
However, With Façade of positive vision, there are deep roots negative
possibilities some of them can be

 The regional focus may be lost

Many regional banks have currently focused on uplifting small players in their
localities, for example, these regional banks organize loan fair in the crop season
so the regional farmer can benefit from the scheme. This kind of practices will
be lost after a single entity will come in to picture.

 The mere size of the bank may not guarantee survival

Many large banks across the world have a history of failure. There was a myth
“TOO BIG TO FAIL” which has been faded after 2008 crisis in which biggest banks
collapsed also many banks in China, Japan, and Italy along with the USA are
funded with taxpayer’s money to escape collapse. There is a big fear if such a big
institution fall it give major shocks to the economy hence government must not
keep all their eggs in the same basket

 The merger may lead to shifting/closure of many branches, ATMs

After the merger of SBI 20%, branches of SBI merged entity are set to close. This
will reduce ease of customer and at the time of Scarcity of cash, there will be
lots of problem to the common person.

 Downsizing in manpower may lead to unnecessary litigation

VRS schemes, Promotion policies, Transfers etc. lead to agitations. Which will
freeze the system and cause daily losses and problems for the people

 Competition, not Consolidation

India right now needs more competition among the banks, not their
consolidation. As there may possibility of Creation of monopoly which will hit
indirectly economy of the country

 Ensuring synergy among the merging entities is a challenge

The biggest problem of mergers and acquisition is synergy, Banks have different
operational procedures, organizational culture. Its tough most of the time for
the people working to cop up with the new organizational environment after
mergers

 No as such need of big loans

As in India, most of the loans are of small ticket size because our most population
is medium class there is no such hard and fast need of creating such a big
institution backing this argument. For big funding, there are already procedures
like the creation of consortium or special purpose vehicles by collaborating
banks to fund big loan

 Increase risk of default

When there will be a single board to fund such mammoth projects there are high
chances of the board to ignore some fact or take some decision in any bias.
When there are a pool of banks coming together to fund such projects there are
a lot of people in power to take decision hence high chance of catching any
ignored mistake or fact

What needs to be ensured?

 Prudent selection of banks without yielding to political, social, trade union
pressure – Merger is to be driven by market forces and business based
decisions.
E.g. North-South merger or Strong – Strong v/s Strong-Weak merger.
 There shall be conscious and organized efforts to synthesize the differing
organizational cultures, for the mergers to yield the desired results.

Conclusion
 Rationalization: Merger is a good idea but it should be carried out with
right banks for the right reasons.
 Mergers are also about people, hence sufficient planning is required to
make the consolidation process smooth.
 Piecemeal consolidation will not provide a lasting solution and requires
an integrated approach from all the stakeholders.
 We need a few large banks along with small ones. Large banks will help
support big projects and international financial and transactional needs.
Small banks will serve at regional and local level. (Three-tier architecture).
 The merger is not the panacea: Apart from the merger, other steps like
bank recapitalization, Indradhanush scheme, Bank Boards Bureau, Higher
operational autonomy, Measures to ensure accountability will help
improve the health of banking system.