Public Sector Banks Merger … Will it work to succeed?

Union Cabinet has given a go-ahead for Bank merger, 10 Public Sector Banks to turn into four big banks.

Union Cabinet has given a go-ahead for Bank merger, 10 Public Sector Banks to turn into four big banks.
Union Cabinet has given a go-ahead for Bank merger, 10 Public Sector Banks to turn into four big banks.

The Union Cabinet has given a go-ahead for the merger proposal and the government claim to have assessed the banks for mergers.

The Union Cabinet nods for bank merger, 10 public sector bank (PSB) to turn into four big banks. Will it change the way India does the banking business? And what could be the long term impact? It’s precocious to draw up any conclusion now. Is this again an Ad Hoc testing measure to tide the crises looming large in the banking sector with huge non performing assets (NPA) and mis-management? A couple of banks have already collapsed and the Yes Bank breaking story on 5th March 2020, 6 pm is adding worry to the customer fraternity of banks[1]. The scenario speaks volumes of the scary state of affairs in our public sector banks and private sector banks. Total out of control from our regulatory authority.

The banks would be able to support specialised loan products for Micro, Small and Medium Enterprises (MSME), short term loans for exporters such as supply chain financing and cash management services.

The Modi government had earlier started the process in 1991 recommended the report on the PSBs bank’s merger. With Dena Bank, Vijaya Bank and Bank of Baroda merging as BOB earlier. SBI and it’s 5 affiliated banks already merged. The new round of mega-mergers announced through cabinet nod on Wednesday 4th March 2020, wherein 10 PSBs to soon turn into four megabanks.

The Union Cabinet has given a go-ahead for the merger proposal and the government claim to have assessed the banks. The bank’s merger is on course and decisions have already been taken by the respective bank boards. As per the mega plan been announced, the United Bank of India and Oriental Bank of Commerce would merge with Punjab National Bank, making the proposed entity the second largest public sector bank. Syndicate Bank will be merged with Canara Bank and Allahabad Bank with Indian Bank. Similarly, Andhra Bank and Corporation Bank are to be clubbed with Union Bank of India. Effective from the next financial year April 1, 2020, the balance sheets, as well as stocks of these banks, will be integrated, according to the scheme of amalgamation approved by the govt.

The govt is stating that businesses and industry will benefit through an increased lending capacity, with the regulatory ceiling for lending to individual borrowers increasing by over Rs 1,500 crore to Rs 3,000 crore. Also adding that the banks would be able to support specialised loan products for Micro, Small and Medium Enterprises (MSME), short term loans for exporters such as supply chain financing and cash management services.

The banks will have to swiftly move to start the process on mergers and the new identity will come into effect from 1st April 2020. All the equation board resolution stakeholders shareholders have to be on the same page and approval done with a short stipulated period. After the process is complete, India will have 12 PSBs instead of 27 back in 2017

SBI working after the merger has been smooth, as they already had prior affix to the merged banks.

Bank unions, who believe the merger is not a solution to the banking sector’s problems, are opposing the move. The oppose is to the anticipated job loss, which will create lesser job vacancies, a compulsory VRS scheme to be introduced and resist the new work environment which will come into force with 3 to 4 different bank mergers.

SBI working after the merger has been smooth, as they already had prior affix to the merged banks. The Dena Bank and Vijaya Bank BOB merger is still to complete 1st year of operation and critical analytics report. The audit report is yet to be scrutinised. Have to wait further to assess the actual pros & cons of the merger.

Generally, there are some pros and cons of bank mergers which will be surfacing while the mergers of banks are as given below.

Pros of Bank Merger:

  1. Merger reduces the management team and closes down extra branches confined to a particular locality with consolidation, thus helping reduce the cost of operation.
  2. Performance and result oriented approaches from the bank’s team improve professional standards.
  3. Competition with other banks paves an increase efficiency ratio on business and banking operations to potential growth prospects.
  4. Workforce reduction, opting for systems, back end space reduction in a smaller team, all contributed to cost-cutting.
  5. With large support, base improves risk management cover.
  6. Merger helps to penetrate unknown territory piggybacking on others’ strength and expand footprint.

Cons of Bank Merger:

  1. Strong banks have to inherit the burden of weak banks
  2. Mergers bring in peoples from certain regional backgrounds together sometime huge tasks to understand and carry them along.
  3. Regionally strong bank is connected emotionally with its customers in a particular region. The loyalty of the customer can get uncertain and diluted with mergers.
  4. Larger banks after the merger get easily effected by global economic crises.
  5. Name change of bank, management team change can adversely affect on bank teamwork performance.

Note:
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

References:

[1] Saga of Yes Bank: Why you need a competent Finance MinisterMar 6, 2020, PGurus.com

Natraj Shetty

1 COMMENT

  1. They merged Indian Airlines and Air India. Result is visible. Nobody wants to buy the company. Same will happen with banks. Sum of parts is not greater than individual parts, when one or more part is rotten. Vote bank politics.

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