This article is written by Roshni Pasrija, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.

Meaning of merger

Merger in easy language means a process in which two or more companies come together and form a new company or two or more companies merge into each other and form one and work under one name. When it comes to the merger of companies the whole process is already given and any merger to execute needs the approval of the competition commission of India because any merger of companies does impact a lot on competition in the market and it affects the economy and people on a large scale. 

Mergers can be two types either it can be Horizontal and Vertical merger. In a Horizontal merger both the companies who are merging are in the same business and also at the production scale whereas in the Vertical merger they are in the same business but the scale of production is different. When two or more companies merge there could be many benefits as both the companies can become strong for each other and their efficiency in work will increase. The company which is acquired can get more opportunities in the market as now they are at a high level where they can even afford to do any experiment. They can increase their supply chain power by working in a vertical merger. By merging, companies can reduce competition in the future by merging with the company which works in the same business and can gain large market share in the market.

Bank mergers means when two or more banks merge together and form as one. In 2019 in India Finance minister had announced merger of 10 public sector banks into 4 banks and now there are 12 Public Sector Banks before they were 27. 

Five major mergers in banks 

1. Oriental Bank of Commerce and United Bank of India got merged with Punjab National Bank after this merger PNB had become the second largest public sector bank in India and its worth came up to Rs.17.94 lakh crore.
2. Syndicate Bank got merged with Canara Bank and this merger made Canara Bank as the fourth largest bank in India and its net worth came up to Rs. 15.20 lakh crore. This has resulted in beneficial for Canara Bank as they can reach a large number of public and can enhance their activity.
3. Andhra Bank and Corporation Bank got merged with Union Bank of India and made this Bank as Fifth largest bank in India and its net worth came to Rs. 14.59 lakh crore. This merger had increased the bank’s business by 2-4.5 times.
4. Allahabad Bank got merged with Indian Bank and made it as the Seventh largest bank in India and its net worth came to Rs 8.08 lakh crore.
5. Vijaya Bank and Dena Bank got merged with Bank of Baroda and this made BOB as the third largest Bank in India and also after this merger of private banks, ICICI got defeated by BOB. Its net worth came to Rs. 16.13 lakh crore. This merger has also brought down the number of banks kept under the Prompt Corrective Action (PCA) framework by the Reserve Bank of India (RBI) to four. Dena Bank is among the five PSU banks kept under PCA watch over burgeoning losses and NPAs.

Five aspects of banks merger in India

Ranking

One of the advantage which all the banks who got merged have faced that there ranking in the sector has improved before that they were somewhere competing with private banks and was low in ranking compared to them, e.g. Bank of Baroda had defeated after the merger to one of the biggest private bank lender ICICI. The ranking also provides the public to trust more on the banks who are in the top 5 banks as they can feel more secure with their money in these banks.

Services

When any merger occurs it does result in better services as there increase in a number of banks, ATMs, and people who work so then people who customers of these banks can utilize services from any of the merged banks. ATMs are easily accessible as their availability is increased. E.g. the Punjab National Bank when it got merged has started an idea of Bank Sathi which was started at all the branches in many zones and head offices which aimed to guide customers to choose better products and services. When better services are given to customers they trust more banks and know that their money will be safe in these banks.

Competition

The merger of banks does impact a lot of competition in the market as now there is more number of banks which together will work and will compete with each other by providing better interest rates or providing loan facility on low interest. When banks merge their net worth increases by which they can compete globally at a high level. In Banks, people who are customers for years should not be bothered about their money as they should feel safe so banks have to maintain their standards while competing with each other that customers should be at a loss. 

Spreading globally

When we talk about the merger the biggest advantage which occurs is banks widen their geographical reach. As when 2 banks decide to merge all their branches across the country will work together and will become one and their ability to reach the public will be doubled. E.g. When PNB got merged its geographical reach increased by 11000 plus branches and more than 13000 ATMs. Spreading globally will help banks to serve their services efficiently to the customers.

Recovered

When any company or any bank decides to merge there is always a strong reason behind that it could be anything may to expand their business or recover from debt or losses or any other which makes it mandatory to merge with another entity. Many banks that were facing losses or were declared under Prompt Corrective Action by the Reserve bank of India came out of it. E.g. Dena Bank was one of the banks from 5 PSUs which was in PCA and NPAs.

Impact of the merger of PSUs

This merger of PSUs has impacted on many things and especially on the economy of the country and it had both merits as well as demerits.

Some of the merits of this merger are:

• The merger will unite the banks which are merging by which their capital will increase and their lending capacity will increase so banks will be able to lend big amounts of better interest. Their balance sheet can become strong after the merger.
• Banks will be able to compete with big banks and will compete on a global level by reducing their cost of lending.
• If banks will have more capital for lending then people can take a high amount of loans from banks to invest in projects which require huge funds for the development of the economy of the country.
• The banks which were running in losses can regain their position in the market by merging it with the bank which is financially strong.
• The merger can help to manage banks’ capital in a better way.
• Better services can be provided to the customers due to the large number of people working in a bank their problem can be resolved soon. 
• Competition can be eliminated as banks that think they can compete with them in the future acquire it and then form a big part in the market and can reduce future hurdles.
• Customers get a wide variety of choices when they want to invest in mutual funds or want to take any insurance or want to have a better investment deal so they get widen choices to choose best for them.
• If there are a lesser number of banks, the ministry can focus on them and watch their activities in better ways.

Some of the demerits of the merger are:

• Issues to manage pertaining to the human resources will be tough to manage.
• The economy can be in the hands of big interlinked banks which can create financial risks.
• Small banks will lose their identity.

Was the merger a good or bad decision

This PSU merger was a kind of decision which was good for the long-term but for short-term it could create some hurdles. According to the government, this merger of public sector banks will improve their lending capacity which will also help banks to work efficiently and will increase their profitability. Some of the positive facts about this consolidation were a big balance sheet, decreased costs, and improved market capitalization, for some banks, this will be difficult; they will have to face some hurdles with this consolidation. This has affected many people as the merger of 12 banks into four will increase layoff and reduction of workforce in the banking sector. According to some of the experts, these mergers are going to be beneficial for the economy in the long term as now public sector banks will be able to compete with private banks and can give equal competition to them.

Conclusion

This article mainly highlights how banks get merged and how mergers can affect so much on the economy at a large scale. Merging banks from 12 PSUs to make them into 4 is not a small decision as the whole economy in long term will be affected by this decision if it went wrong and as being a developing country like India we cannot afford this risk. In India when it comes to keeping people’s money safe it all comes to the government they are responsible for it so the government will not make any kind of wrong decision for its people.

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