Context:

Government of India decided to merge three Public Sector Banks namely – Bank of Baroda, Vijaya Bank and Dena bank into one single entity. Though termed Bank merger it being called as bank amalgamation. The resultant entity after amalgamation will be the third largest Public Sector Bank in India after State Bank of India and Punjab National Bank.

Historical Background of Bank Consolidation in India:

After the wave of economic liberalization, a committee under the chairmanship of Maidavolu Narasimham (13th Governor of Reserve Bank of India (RBI) was constituted in 1991 and again in 1998 to recommend reforms required in banking sector. Narsimhan Committee 1991 Recommendation include:

• Actual numbers of public sector banks need to be reduced
• Recommended mergers to form a three-tier structure
• Three to four big banks including SBI should be developed as international banks
• Eight to ten banks having nationwide presence should concentrate on the national and universal banking services.
• A large number of Regional Banks focusing on agriculture and rural financing.
• No further nationalization
• Liberal entry norms for private and foreign banks
• Narsimhan Committee 1998 Recommendation:Strengthening Banks in India: It recommended the merger of strong banks which will have ‘multiplier effect’ on the industry.

 Why go for Bank Consolidation?

• Lower return on the capital employed by the government: All the PSBs have a government sharing upward of 53.81%, they are doing same business and compete to serve similar customers. It meant a lower return on the capital employed by the government which has competing demands for funds, and growing competition.
• Reduced Recapitalisation Burden– 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.
• Cutting Cost and Acquiring Efficiency – Several banks that are majority-owned by the government, virtually doing the same business, and competing for the same pie of customers wasn’t a sensible strategy. Since financial stability is not threatened and depositors are not running the risk of losing money (as long as the banks have government backing), the primary logic for consolidation should be cutting cost and acquiring efficiency.

There are multiple expected ways in which this can be achieved:

• Weaker bank sells its assets
• Closes loss making branches
• Entail sale of real state where branches are redundant
• Manage headcount – providing voluntary retirement schemes
• Multiple senior management posts will be abolished bringing in financial prudence.
• To increase the risk taking ability-The aim of the government is to increase the risk taking ability of the banks.Banks will not be reluctant to approve big loans to averse the risk.
• To reduce government holding-The government owns majority stakes in 21 Public Sector Banks (PSBs) virtually doing the same business and competing for the same pie of customers.
• Bad loans problem-Ever-rising NPAs have created the urgency for bank consolidation. Big banks can absorb shocks and have capacity to raise resources without depending unduly on the state exchequer.

Implications of Bank Merger

For economy

• Robust banking system with global presence
• Help in solving bad loans issue
• Credit availability in the economy
• Government expects NPA problem will be cured

For minority stakeholders

• Immediate effect of merger announcement has brought volatility in stock prices. For example: Investors in Bank of Baroda and Vijaya Bank have lost 14% and 12% in market value.
• Shareholders may experience dilution of voting power due to increased number of shares.
• SBI’s recent merger saw customers of associate banks opting to move their business to rival lenders as result of a lack of comfort in banking with the larger parent

For general people

• Prices of products or services will decrease
• Quality of products or services will enhance
• Customer satisfaction may increase/decrease depending on the circumstances
• There might be a change in accessibility to their customary banking institutions.

For financial inclusion

• 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.
• Increased accessibility of financial services at affordable cost
• Recent announcement of third phase of consolidation of Regional Rural Banks(RRBs) will further enhance capital base and area of operation. It will provide credit and other facilities to small farmers, agricultural labourers and artisans in rural areas.

Disadvantages of Bank Merger

• In India most of the merger has been a consequence of compulsions like NPA, inefficiency which has only led to failure in objectives in 90% of cases.
• The move towards consolidation is contrary to the initial focus on regional banking requirements.
• Different global financial crisis have seen large global banks collapsing while smaller ones had survived the crisis due to their strengths and focus on micros aspects.
• With the merger, the weaknesses of the small banks are also transferred to the bigger and healthier bank.
• So far small scale losses, recapitalization could revive the capital base of small banks. Now if the giant shaped SBI books huge loss or incurs high NPAs as it had been incurring, it will be difficult for the entire banking system to sustain.
• Shifting and closure of many branches- for example, 20% SBI branches are closed after merger
• Large banks are not necessarily better banks as seen in SBI merger case.

Key challenges:

• Integrating different cultures– Integrating the cultures of two merging banks remains a major task as even SBI has not been able to escape the pain of merging its associates with itself.
• Identity loss- An enforced merger will lead to identity loss for the staff and its large clientele. For example- Vijaya Bank may face identity loss after its merger with Bank of Baroda.
• Human Resource management– Merger announcements trigger confusion, anxiety and insecurity in staff.
• There will be staff surplus requiring relocation or enforced retirement.
• Ensuring that no employee will face adverse service conditions as a consequence of the amalgamation.
• Rationalisation of work procedures between merging entities
• A process of confidence building among the officials is needed and this is in its nature a time-consuming exercise.
• Operational autonomy– operational autonomy for senior management must be ensured for new entity formed after merger.
• Governance and regulatory structure – Governance structure and regulatory structure of the consolidated bank remains in a grey area.
• Too big to fail– The global financial crisis of 2007-08 had established that when institutions are too big, regulatory intervention would get diluted 

Way Forward

• Public sector banks should not be merged mindlessly to create a few bigger banks. Prudent selection of banks based on market forces is the need.
• Raghuram Rajan, has, in his note to the Estimates Committee of parliamentspelt it out clearly: “improve governance of public sector banks and distance them from the government” and “delegate appointments entirely to an entity like the Banks Board Bureau.”
• We need a mix of efficiently run PSBs and private banks to serve both development goals and social justice.
• Promoting saving culture among the masses, reducing the gender gap in accessibility of financial services, promoting digitization should also be the priority of the lenders.
• Forced mergers should be avoided and should not become a means to imbibe issues that deeply stall our financial institutions and needs to be addressed separately.