History of Bank Merger in India: Advantages & Challenges of Merger of Banks on Indian Economy


By
Dr. Jyoti Sharma
Senior Academic Consultant
MAHIAA Energy and Environment Technology Consultancy Services
Delhi
 


Introduction

The Banking Companies(Acquisition and Transfer of Undertakings)Acts of 1970 and 1980 provide that the Central Government, in consultation with the Reserve Bank of India (RBI), may make a scheme, inter alia, for the amalgamation of any nationalised bank with any other nationalised bank or any other banking institution Various committees, including Narasimhan Committee (1998) constituted by RBI, Leeladhar Committee(2008) chaired by RBI Deputy Governor, and Nayak Committe (2014) constituted by RBI, have recommended consolidation of Public Sector Banks (PSBs) given underlying benefits/synergies. Taking note of this and potential benefits of consolidation for banks as well as public at large through enhanced access to banking services, Government, with a view to facilitate consolidation among public sector banks to create strong and competitive banks, serving as catalysts for growth, with improve risk profile of the bank, approved an approval framework for proposals to amalgamate PSBs through an Alternative Mechanism (AM). AM, after consulting RBI, in its meeting held on 17.9.2018, approved that Bank of Baroda, Vijaya Bank and Dena Bank may consider amalgamation of the three banks. Banks have since considered amalgamation and the Board of Dena Bank has recommended the same, while Boards of Bank of Baroda and Vijaya Bank have given in-principle approval therefor. RBI has furnished bank-wise total income of PSBs and private sector banks in the financial year FY 2017-18 in this regard, which is given in Annexure.

Over the last four and half years, Government has pursued a comprehensive approach for addressing non-performing assets (NPA) issues. Key elements are as under:

Recognizing NPAs transparently: Forbearance has been ended and stressed assets classified as NPAs under the Asset Quality Review (AQR) in 2015 and subsequent recognition by banks. Further, restructuring schemes that permitted such forbearance have been discontinued in February 2018. As a result, as per RBI data, Standard Restructured Assets (SRAs) of Scheduled Commercial Banks (SCBs) have declined from the peak of 6.5% in March 2015 to0.49% in September 2018.

Resolving and recovering value from stressed accounts through clean and effective laws and processes: A fundamental change has been effected in the creditor-debtor relationship through the Insolvency and Bankruptcy Code, 2016 (IBC) and debarment of wilful defaulters and connected persons from the resolution process. A sizeable proportion of the gross NPAs of the banking system are at various stages of resolution in National Company Law Tribunal(NCLT). To make other recovery mechanisms as well more effective, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI)Act has been amended to provide for three months imprisonment in case borrower does not provide asset details, and for lender getting possession of mortgaged propertywithin30 days, and six new Debts Recovery Tribunal (DRTs) have been established. As a result, NPAs of PSBs reduced by Rs. 2,61,359 crore over the last four and a half financial years. Further, PSBs reported record recovery of Rs. 60,713 crore in the first half of FY 2018-19 (H1 FY 2018-19), which is more than double the recovery made in the first half of FY 2017-18, and gross NPAs have begun declining with a reduction of Rs. 26,798 crore in H1 FY 2018-19. 30-day plus overdue account (Special Mention Accounts (SMA) 1 and 2) have also reduced steadily to around 39% over five quarters (from Rs 2.25 lakh crore in June 2017 to Rs. 0.87 lakh crore in September 2018 for PSBs), indicating significant and sustained reduction in risk of fresh NPAs. Thus, improvement in asset quality is evident with GNPAs having peaked recognition nearly over, and the amount in SMA 1 and 2 reducing by 61% over five quarters. Further, with substantial provisioning, the provisional coverage ratio(PCR)o SCBs has risen steadily to 67.17% as of September 2018, from the pre-AQR level of 49.3% in March 2015,cushioningbank balance-sheets to absorb the impact of NPAs.

History of Mergers in Indian Banking

Mergers of banks began in India in the 1960s in order to bail out the weaker banks and protect the customer interests. After that in post liberalization period the quest to create an Indian bank that would be in the league of global giants had been continuing since 1990. Moving on the path of creating one of the largest global banks, the government had approved the merger of five associate banks with SBI in February 2017. Later in March, the Cabinet approved merger of BMB also.

Merger & Nationalization during the period from 1961-1969: The period is called pre-nationalization period because in 1969 the government nationalized 14 private banks. As many as 46 mergers took place mostly of private sector banks in order to revive the poorly performing banks which proved to be quite a successful move for the underperforming banks

The period from 1969-1991: The period was called post-nationalization period. It saw six private banks being nationalized in 1980. In this period 13 mergers took place mostly between public and private sector banks.

The post liberalization period, which stretches from 1991-2015, saw major economic reforms initiated by Government of India. Many new policies were framed. Greater FDI and foreign investment was allowed which saw resurgence in Indian Banking. As many as 22 mergers took place - some to save weaker banks and some for the sake of synergic business growth.

Bank Mergers (1993-2004): The merger of Oriental Bank of Commerce with Global Trust bank in 2004 saved the latter after its net worth had wiped off and also handed OBC a million depositors and a decent market in South India. Mergers of Punjab National Bank (PNB) with the then eroded New Bank of India (NBI) in 1993-94 and that of Benaras State bank Ltd with Bank of Baroda in 2002 also proved to be life saving for the weaker bank. 

Bank Mergers & Consolidation 2008-2010: SBI first merged State Bank of Saurashtra with itself in 2008. Two years later in 2010, State Bank of Indore was merged with it. The board of SBI earlier approved the merger plan under which SBBJ shareholders got 28 shares of SBI (Re.1 each) for every 10 shares (Rs10 each) held. Similarly, SBM and SBT shareholders got 22 shares of SBI for every 10 shares.

Post the merger, the SBI was in the process to rationalize its branch network by relocating some of the branches to maximize reach. This, according to SBI helped the bank optimize its operations and improve profitability. SBI had approved separate schemes of acquisition for State Bank of Patiala and State Bank of Hyderabad. There was no proposal for any share swap or cash outgo as they were wholly-owned by the SBI.

Consolidation of Banks (2015-2017) This phase saw five associates of SBI and Bhartiya Mahila Bank getting merged in SBI. The vision was to have strong banks rather than having large number of banks. This resulted in SBI being one amongst the 50 largest banks in the world.

Union Cabinet decided to merge all the remaining five associate banks of State Bank Group with State Bank of India in 2017. After the Parliament passed the merger Bill, the subsidiary banks  ceased to exist and the State Bank of India (Subsidiary Banks) Act, 1959 and the State Bank of Hyderabad Act, 1956 were repealed.

Five associates and the Bharatiya Mahila Bank became the part of State Bank of India (SBI) beginning April 1, 2017. This has placed State Bank of India among the top 50 banks in the world. The five associate banks that were merged into State Bank of India were- State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT). The other two Associate Banks namely State Bank of Indore and State Bank of Saurashtra had already been merged with State Bank of India. After the merger, the total customer base of SBI increased to 37 crore with a branch network of around 24,000 and around 60,000 ATMs across the country.

Merger of Banks 2018- The government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating the third-largest bank by loans in the country in 2018.

Mega Merger of Banks 2019- With the mega merger announce on August 30, 2019, ten public sectors banks will be reduced into four large banks. The four sets of banks are to be created out of Canara Bank and Syndicate Bank merger; Indian Bank and Allahabad Bank merger; Union Bank of India, Andhra Bank and Corporation Bank merger; and the bank to be created after merger of Punjab National Bank, Oriental Bank of Commerce and United Bank of India.

Six Banks Untouched: The mega merger has left untouched six other banks out of which two are national banks and the four have regional focus. The untouched banks are Bank of India, Central Bank of India, Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab & Sind Bank which will continue as separate entities as before.

Punjab National Bank to become 2nd Largest Bank: Oriental Bank of Commerce and United Bank merger into Punjab National Bank will create a bank with 17.95 lakh crore business and 11,437 branches.

4th Largest Bank Merger of Canara Bank & Syndicate Bank: The merger of Syndicate Bank with Canara Bank will create the fourth largest public sector bank with 15.20 lakh crore business and a branch network of 10,324.

5th Largest Bank: Merger of Andhra Bank and Corporation Bank with Union Bank of India will create India's fifth largest public sector bank with 14.59 lakh crore business and 9,609 branches.

7th Largest Bank: The merger of Allahabad Bank with Indian Bank will create the seventh largest public sector bank with 8.08 lakh crore business having strong branch networks in the south, north and east of the country

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.
  • 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 coverageLarger 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.

News and Update Reference Source-

News Article by Dr Jyoti Sharma for Mahiaa Energy and Environment Technology Consultancy Services Delhi for December  2019 Month
 

                                                                                                                                                                               

   Published on IndianFaculty.com: 19/12/2019

 Source: E-mail 13/12/2019

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