Merger of Merger of Banks in India – Good or Bad?

Recently, the Union Ministry of Finance decided to merge three public sector banks namely of Baroda, and . However, the decision to merge at the time of weakening trend of banks has raised serious concerns.

Background

 The idea of bank consolidation was around since 1991, when former RBI governor M. Narasimham had suggested the government to merge banks into a 3-tiered structure, with 3 large banks with a global presence at the top, 8 to 10 national banks at tier 2 and a large number of regional and local banks at the bottom.

 In 2014, PJ Nayak Panel had also recommended that the government should either merge or privatize Public Sector Banks (PSBs).

Why Banks Merger/Consolidation?

 Public Sector Banks (PSBs) in India is highly fragmented compared to other key economies.

 The merger will facilitate the government to pay closer attention to the enlarged institution.  It will protect the financial system and depositors’ money since the enlarged institution will be more profitable and better deal with any stressed loans.

 To develop the capacity to satisfy the demand for credit (loan) and sustain economic growth.

 In 1991 itself, recommended that India should have fewer but stronger PSBs.

What is the procedure for Banks Merger?

 Bank consolidation procedures are provided under the Banking Regulation Act, 1949.

 Any two PSBs can initiate merger discussions, however, the merger scheme should be finalized by the government in consultation with RBI and it must be placed in Parliament for approval.

 Parliament has the right to modify or reject the merger scheme.

 Parliamentary approval is also necessary for the merger between a public sector bank and a private bank.

What is the significance of PSBs mergers? (pros)

 It will reduce their dependence on the government for capital since it will increase the role of internal and market resources.

 It will open up more capital generation opportunities, both internally and from the market, for the merged entity.  For the government, it will enable more dividends which forms part of their non-tax revenue.

 It will lead to greater concentration of payment and settlement flows since there will be lesser competitors in the financial sector.

 Operational risks would decrease after the merger because when the size of the operations grows, the distance between management and operational personnel is greater, thus creating a geographical gap leading to a less efficient system. The merger of banks could avoid it.

 It will help to better deal with their credit portfolio including stress or Non-performing assets (NPAs). Because consolidation will prevent more resources being spent in the same area and strengthen banks to deal with shocks.

What are the concerns regarding the merger? (cons)

 Weaker banks would make an unhealthy impact on the operations of the stronger one after the merger.

. For instance, after the announcement of the merger, shares of and Vijaya Bank fell substantially. However, Dena bank gained sharply.

. Notably, Dena bank is the bank in the worst financial situation among the 3 entities. It is currently under RBI Prompt Corrective Action Framework (PCA). Note – Learn about PCA at the bottom.  The strategy to ask healthy banks to take over weak banks is less likely to solve the bad loan crisis in the banking system.

 Minority shareholders will be affected by the decision of dominant shareholder i.e., the government, as the former left with no say in the matter.

 Human resource and cultural issues can also impede the success of mergers.

 It will impede the government’s goal of to reach the unbanked poor. It has to be noted that, during the post- liberalisation period after 1991, the merger of state banks with its associates resulted in the closure of about 5,000 branches in rural and remote areas.

What are the challenges with the merger?

Management: With the merger, the management will bear critical challenges with respect to staff integration, rationalisation of branches, synchronizing accounting, cultural compatibility, policies for recognition of bad loans etc.

Employees: The whole process face resistance from employee unions, who are fearful of losing their jobs. Their promotion prospects may be affected due to a reduction of seniority in the merged entity. Further, the rationalisation of branches will lead to their relocation. Pensions: Pension would be affected due to different employee benefit structures.

Process: A merger in the private sector will include changing the shareholders. But this is difficult with PSBs since the government is the dominant shareholder.

What should be the government’s move?

On Financial inclusion: Government should not look at the merger as the only way for financial inclusion.

 Financial inclusion can be better served with other means like Jan Dhan Yojana and

 Establishment of India Post that took banking services to the doorsteps of the unbanked poor.

 The government should give some time for these programmes to yield meaningful results.

On NPA: Government should not see the banks consolidation as the only means to solve the NPA crisis.

 There are legal and regulatory measures to address the NPA issues through a market-based resolution plan in the form of insolvency and bankruptcy (IBC) code.

 Efforts were also taken to put 11 banks under surveillance via prompt corrective action (PCA) plan to de-stress the banking sector. Infrastructure banks: Government can establish infrastructure development banks to fund infrastructure projects and relieve PSBs of this task. Infrastructure is one of the key components of stressed loans due to its long-term nature.

Governance: Government should focus on improving governance in PSBs through Bank Board Bureau and not interfere in the loan sanctions.

Way ahead

Undeniably, there are too many public sector banks in India and hence consolidation is a good idea in theory. However, mergers should be done between strong banks. It is crucial to ensure that such mergers do not end up creating an entity that is weaker than the original pre-merger strong bank. Certainly, mergers are just one way of managing the crisis and thus cannot be ignored totally. But the trick lies in ensuring that the merger process is managed prudently. Identifying synergies and exploiting scale efficiencies will be important here.

About Prompt Corrective Action (PCA) framework

 It is meant to take necessary corrective action on weak and troubled banks.

 Under this, RBI has created some trigger points to assess, monitor and control banks.  The trigger points are based on CRAR (a metric to measure balance sheet strength), NPA and ROA (Return on Assets).

 Based on each trigger point, the banks have to follow a mandatory action plan.

 Once the bank triggered the point, it will be barred from undertaking fresh business activities like opening branches, recruiting personnel or lending to risky firms.

 Apart from these actions, RBI could also take discretionary action plans. Second article Banks Merger in India: Is it good for Indian Economy?

Updated on April 02, 2020

The largest ever merger in the public sector banking space in India has taken place on Wednesday April 1, 2020 when six Public Sector Banks were merged into four large banks in a bid to make them globally competitive. Customers, including depositors of the merging banks, will now be treated as customers of the banks in which they have merged.

Following the consolidation, there are now seven large public sector banks (PSBs), and five smaller ones. There were as many as 27 PSBs in 2017. The total number of public sector banks in the country have come down from 18 to 12 from April 1, 2020.

Merger and Acquisition of Banks in India and its effects has become a favourite topic of Group Discussion in FMS Delhi, IIMs, MDI, XLRI among others. Apart from other B-schools, FMS Delhi also placed this topic in the final selection round in 2018. Below is shared the solved write up on the topic.

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 have merged into (PNB); into ; and into ; and into .

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.

Last year, Dena Bank and Vijaya Bank were merged with Bank of Baroda. Prior to this, the government had merged five associate banks of SBI and with the public sector bank. These were , State Bank of Bikaner and Jaipur, , and effective April 2017.

Punjab National Bank becomes 2nd Largest Bank: Oriental Bank of Commerce and United Bank merger into Punjab National Bank has created 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 has created 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 has created 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 has created 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

India has 12 Banks Now The biggest overhaul in public sector banks has left India with only 12 banks now instead of 18 before the Merger. According to the Government this decision of making large entities will make the Indian banks capable of meeting the higher funding needs of the economy and will help in acquiring the global scale. Banking order (Largest to Business in Lakhs of crore Market Share Smallest) Rupees 52.1 22.5 PNB+OBC+United Bank 17.9 7.7 HDFC Bank 17.5 7.6 Bank of Baroda 16.1 7 Canara + Syndicate Bank 15.2 6.6 Union+Andhta+Corporation Bank 14.6 6.3 ICICI Bank 12.7 5.5 10.6 4.6 Bank of India 9.0 3.9 Indian + Allahabad Bank 8.1 3.5 Source: ToI dt Aug 31, 2019

Fruitful Result of Banks’ Merger As per studies conducted, most of the mergers done in the past, have proved to be an overall success for the weaker banks although there are no concrete parameters to verify this observation. Hence going by the track record merger and acquisition in Indian banking have been fruitful for the Indian Economy.

Banks’ Merger: Background Announcing the mega plan of Banks’ merger on Friday August 30, 2019 with an aim to have financially strong Public sector banks in India, the Finance Minister of India Nirmala Sitharaman had outlined the Government’s plan to merge 10 public sector banks into four large banks. After the mergers, there will be 12 public sector banks in India, including State Bank of India and Bank of Baroda. The merger is expected to create fewer and stronger global-sized Banks to boost economic growth.

On March 4, 2020, the Finance Minister announced the final date of merger as April 1, 2020. According to her, the exercise of consolidation of 10 public sector banks (PSB) into four is on course and the merger will come into effect from April 1, 2020. The Union Cabinet has given a go-ahead for the merger

It is but the desire for growth that acts as the fuel not only for an entrepreneur but also for every professional or corporation. This deep desire for growth in terms of customer base, balance sheet and profit has led the organizations engaging in mergers and acquisitions to move ahead and onwards in synergy.

The Indian Banks too did not stay aloof from this wave of mergers and acquisitions (M&A). Initially banks were merged to save non- performing banks or non efficient banks but as time evolved the system too evolved. In the recent times mergers and acquisitions have also been made on grounds of business growth, profitability and organizational restructure.

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 . 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 (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 with itself in 2008. Two years later in 2010, 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 are now reduced into four large banks. The four sets of banks that have been 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 .

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, of India, , Uco Bank, and Punjab & Sind Bank which will continue as separate entities as before.

Rs. 55000 Crore Recapitalization Plan With Mega Merger The Finance Minister of India has also announced Rs.55,000 Crore recapitalization plan for the banks formed after merger. Besides, recapitalization will also be infused to the six other banks which are not the part of this merger. Amount of Recapitalization announced (Rs. in Banking Recapitalization (Highest to Lowest) Crores) Punjab National Bank 16,000 Union Bank of India 11,700 Bank of Baroda 7,000 Canara Bank 6,500 Indian Overseas Bank 3,800 3,300 UCO Bank 2,100 United Bank of India 1,600 Punjab & Sind Bank 750 Source: ToI dt Aug 31, 2019

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 , 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. Important But to Remain under Watch Mergers are important for the consolidation and expansion purposes that is why in today’s scenario many private sector banks are genuinely interested in mergers and acquisition. They are also crucial for Economy as they are most of the times successful in saving weak banks which fail in meeting expectations.

Merger creates variety of problems which can cause great damage if the process of merging is not executed properly.

If merging is needed it must be executed in a manner which leads to an environment of trust and agreement among the people of both the organizations. If people, work culture and vision are blended together nicely, merging will definitely have synergic effects and create a win- win situation. ------Mega Bank Merger: Key Figures, Motive, Impact, Significance & all you need to know - Explained Merger of Big Banks: 10 mega banks merged into 4 PSBs. India will now have 12 Public Sector Banks from 27 Public Sector Banks in 2017. Know the key facts & figures, the objective behind the merger, its impact and significance here. RUPALI PRUTHI AUG 30, 2019 18:46 IST

Mega Bank Merger: Union Finance Minister Nirmala Sitharaman announces the merger of ten big public sector banks (PSBs) into four. The banks which are being merged are Punjab National Bank, Oriental Bank of Commerce, United Bank of India, Indian Bank, Allahabad Bank, Canara Bank, Syndicate Bank, Union Bank of India, Andhra Bank and Corporation Bank. India will now have 12 Public Sector Banks from 27 in 2017. The merger of banks was announced under the Bank Consolidation plan among other major initiatives and steps to accelerate the economic growth of India. While addressing a press conference, FM Sitharaman mentioned that only six banks showcased profitability in the 4th Quarter of 2018-19. However, in Quarter 1 of 2019, 14 PSBs showcased growth and profit. In order to boost the national presence of banks along with their global reach, the amalgamation of banks was necessitated. This is not the first time that the Government is merging the banks together. Earlier, under the Banks Consolidation plan itself, the Government had merged all the entities of State Bank of India into one and merged Bank of Baroda, Dena Bank and Vijaya Bank as one single entity. The merger of these banks is aimed at making India a USD 5 trillion economy. Banks to be merged together are: - Punjab National Bank, Oriental Bank of Commerce, United Bank of India will be merged as one

- Canara Bank & Syndicate Bank

- Union Bank of India, Andhra Bank and Corporation Bank

- Indian Bank & Allahabad Bank

The Government targets USD 5 trillion economy through these bank reforms and consolidation. The Government would infuse Rs 55,250 Crore of capital in these 10 big banks for their credit growth and regulatory compliance to boost the economy. Apart from these merged banks, two public sector banks will continue to work as an independent body to strengthen national presence. These banks are Bank of India and Central Bank of India. Four regional banks will also continue to work independently to strengthen the regional focus. These are: Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab & Sind Bank

Details of Amalgamation of 10 Banks into 4 NextGen PSBs Head/Anchor Business Size Merged banks PSB Size Bank (Rupees) Punjab National Bank Punjab Oriental Bank of 17.94 Lakh crore 2nd largest Bank National Bank Commerce United Bank of India Canara Bank Canara Bank 15.20 Lakh crore 4th largest Bank Syndicate Bank Union Bank of India Union Bank of Andhra Bank 14.59 Lakh crore 5th largest Bank India Corporation Bank Indian Bank Indian Bank 8.08 Lakh crore 7th largest Bank Allahabad Bank State Bank of India (Merged earlier)52.65 Lakh crore 1st largest bank Bank of Baroda (Merged earlier) 16.13 Lakh crore 3rd largest bank Banks that will continue to work individually: Apart from these 10 merged entities, six banks will continue to work individually. Have a look at the details of these banks:

Bank Business Size 9.03 Lakh crore (6th Largest Bank of India Bank) Central Bank of India 4.68 Lakh crore Indian Overseas Bank 3.75 Lakh crore UCO Bank 3.17 Lakh crore Bank of Maharashtra 2.34 Lakh crore Punjab & Sind Bank 1.71 Lakh crore Capital Infusion in the Public Sector Banks Finance Minister Sitharaman also announced capital infusion in the public sector banks with an aim to scale them. The Government plans to infuse Rs 55,250 Crore of capital in the PSBs. Have a look at bank-wise capital infusion:

Bank Capital Infusion Punjab National Bank Rs 16,000 crore Union Bank of India Rs 11,700 crore Bank of Baroda Rs 7,000 crore Indian Bank Rs 2,500 crore Indian Overseas Bank Rs 3,800 crore Central Bank of India Rs 3,300 crore UCO Bank Rs 2,100 crore United Bank of India Rs 1,600 crore Punjab and Sind Bank Rs 750 crore Figures of Amalgamated Banks

Motive & Objective behind Merger of PSBs The Finance Ministry opines that the merger of these 10 public sector banks (PSBs) will help India make a USD 5 Trillion Economy. The bank merger was done under the bank consolidation plan of the Union Government. Have a look at the government’s objective behind the merger of these banks:

- Enhanced capacity to increase credit - Banks with a strong national presence and international reach

- Reduction in lending cost

- Next Generation technology for the banking sector

- Improved ability to raise market resources