MERGER OF BANKS – PROS AND CONS

Reasons for being in news

Recently government has announced merger of Bank of Baroda, Vijaya Bank and Dena Bank — aimed at creating the country’s third largest bank with a business of Rs 14.82 lakh crore and over 9,600 branches across the country.

Background

It has been more than 27 years since a committee headed by Reserve Bank of India (RBI) Governor M Narasimham first made out a case for pruning the number of government or state-owned banks. That committee, which was appointed in 1991 by Manmohan Singh who was then Finance Minister, had recommended a restructuring of Indian banks, with three or four large banks including State Bank of India that could be positioned as global banks, besides eight to ten with a national footprint or presence, rather than having over two dozen state-owned banks.

The rationale behind mergers

1 . Having several banks that are majority-owned by the government, virtually doing the same business, and competing for the same pie of customers is not a sensible strategy.

2 . It also means a lower return on the capital employed by the government which has competing demands for funds, and growing competition.

3 . The government and banking regulator RBI have also emphasised the changing face of banking marked by technological changes; challenges to raising capital that the owner (the government) has to provide periodically; the need for consolidation in the sector and putting an end to fragmentation.

Examples of successful mergers

When private lender GTB was in trouble over 15 years ago, the regulator(RBI) and the government settled on state-owned Oriental Bank of Commerce to step in. There were also the case of United Western Bank and IDBI, Bank of Rajasthan and ICICI Bank, and HDFC Bank and Bank of Punjab. And recently merger of five susbidiaries of the State Bank of India in 2017 to create an entity with a size of over Rs 44 lakh crore.

Why mergers are advocated?

1 . Mergers are often advocated on the basis of synergies. These could be in terms of operational efficiency with a large pool of staff in a merged entity being put to work for boosting business, expanding reach and offering more services or products.

2 . Wider access for both the proposed new entity and its customers.

3 . From the government’s and regulator’s point of view, the move may lead to a lower NPA (non-performing assets) ratio for the new bank compared to the NPA ratios of previous banks.

4 . What this could mean down the line is lower requirements of capital from the government and also the ability of a large bank to lend more on the strength of its higher capital base and to expand business, rather than being dragged down because of weak financials and being forced not to lend.

What are the challenges which mergers may face?

1 . The challenge is integration in a new entity, whether in operations or culture.

2 . Human resources can often be a deal breaker: contrasting HR practices and aligning these with employee expectations or aspirations will also test the new management.

3 . The other major test will be leadership — choosing one of the CEOs to head the new bank and with a reasonable tenure.

4 . Addressing the concerns of unions and shareholders.