This article is written by CA Chetan Swaroop Monga. He is a practising Chartered Accountant.

Background

Banking sector forms the very base of our economy thus it is of momentous importance to keep this sector healthy and strong. The RBI which regulates the banking sector of the Indian economy keeps an eye on the functioning of the banks in our country and comes up with the rules and regulations keeping a track of current economic, international, social and other factors.

The fact that our banking system is facing conundrums of NPAs is well known and the situation is worsening day by day. The willful defaults, frauds and collapse of the business houses have led to such a situation. The problem of NPAs is becoming dire with each passing day. This ordeal has risen because of the factors stated above but it is pertinent of place in records that the mismanagement and inefficiency by the banks have also contributed to making the situation deplorable.

 All these factors along with the aim of strengthening the banking sector, it was felt to bring a paradigm change in the banking sector which will not only provide the fillip but also curb the lapses in the banking sector.

This brought into picture the mammoth merger of five of the subsidiaries of the State Bank of India with the parent (State bank of India) in 2016. SBI first merged State Bank of Saurashtra with itself in 2008. Two years later, State Bank of Indore was merged with it.

Recent updates in the Banking Sector related to Merger

It is the never-ending desire for growth that keeps every business house running and trying new avenues for growth. This desire for growth has increased the merger and acquisition activities across the board and 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 evolved too. In recent times mergers and acquisitions have also been made on grounds of business growth, profitability and organizational structure. There were 27 public sector banks in 2017. In 2018, the government of India announced the merger of Vijaya Bank and Dena Bank into Bank of Baroda to create the country’s third largest lender. In August 2019, in the biggest consolidation exercise in the banking arena, the Government announced four major mergers of public sector banks, bringing down their total number to 12 from 27.

The details of the mega merger exercise of public sector banks are as under:

• United Bank and Oriental Bank of Commerce will be merged with Punjab National Bank (referred to as ANCHOR BANK), making the proposed entity the second largest public sector bank with business of 18 lakh crore.
• Syndicate Bank will be merged with Canara Bank (referred to as ANCHOR BANK). The consolidated Canara Bank will be the fourth largest bank with business of Rs 15.2 lakh crore.
• Allahabad Bank will be amalgamated with Indian Bank (referred to as ANCHOR BANK). After subsuming Allahabad Bank, Indian Bank will be the seventh largest state-lender with a business size of Rs 8.08 lakh crore.
• Andhra Bank and Corporation Bank will be consolidated with Union Bank of India (referred to as ANCHOR BANK). The consolidated Union Bank of India will be the fifth largest bank with business of Rs 14.59 lakh crore.

Impact of Mega Merger of Banks on Banking Sector and Indian Economy

Every decision taken by the Government is for the betterment and increasing the robustness of the system but it cannot be denied that it may have some flaws that cannot be predicted at the time the decisions are taken or the negative impact that it may have when those decisions are implemented at the grass root level. Because of this factor, the Government comes up with regular policy changes so that the system becomes stronger than before.

Keeping in mind what has been mentioned above, this mega merger activity in the banking sector will have some positive and negative impact which will be seen as the time passes by. But predominantly what can be seen initially, it is going to have a favorable impact on our economy.

Advantages of the Merger

• Bad Loans/NPAs are one of the biggest problems of our banking system which is creating hindrance in the growth of the economy as a whole. NPAs have been increasing at an alarming rate which has jeopardized the financial system of the country. YES BANK (private sector bank) fiasco is known to everyone. Had RBI not stepped in, YES BANK would have crashed and put the entire economy at halt. By merging comparatively weaker banks with the stronger banks, the Government has made effort to make sure that the weaker bank is not wiped out from the market because of the bad loans/NPAs. By merging the banks, the legal cost and other ancillary costs will comparatively come down as it is seen that the same borrower has taken loan from a number of banks. Every year banks spend hefty amounts in the recovery of the bad loans, by bringing such cost down banks can save significantly. It has also been seen that there are instances of reckless funding. Mergers of banks will also keep a check on this by sharp monitoring and thus reducing the NPAs.
• By merging banks, the banks will become bigger and better as it will be catering a large segment of customers as compared to its current position. Services will be available conveniently to customers through a single bank rather than by approaching different banks. Big customer base will help the banks to have good profitability as the merged bank will enjoy synergies. The merged banks will have the better business portfolio, asset quality, improved market capitalization, risk appetite and risk management strategies. There will be very less chances that the banks will fail. Post merger the public banks will be in a better position to face competition from the private players in the market. The merged banks will enjoy economies of scale and reduction in the cost of doing business. Post merger the banks will be in the better position to finance mammoth projects which earlier they could not finance independently thus making the funding process for those projects quick and easy.
• Even after so many years Indian Banks have failed to have a global presence. There are several reasons for the same including the size of the balance sheet, inadequacy in the operations, not meeting the international banking standards etc. Post merger not only the banks will have the global presence but also will be able to be a prime part of the International banking system. In the pre- merger era RBI had to manage a comparatively  large number of banks thus making it a cumbersome task. Now with comparatively fewer banks to manage, RBI will be able to implement the banking standards followed by the developed economies and thus bringing Indian banks in line with the banks having International presence. Currently, the State Bank of India is in the list of top 50 banks globally. 
• The post-merger era will bring down the operational cost significantly. Cost saving on account of treasury operations, audits, controls, technology, management will help banks to bring the overheads down. Merging will help the banks to pool the resources and use them in an effective and efficient manner. The mergers will result in rationalization of branches, roles and functions getting reduced. However, the Finance Minister has confirmed that there will be no retrenchments and the employees will only benefit with the mergers.

Disadvantages of the Merger

After discussing at stretch about the benefits of the mega merger activity happening in the banking space, there are few apprehensions/ disadvantages that have cropped up which have been listed below:

• Various internal conflicts and disputes may arise with regard to promotion and other potential issues. Different banks have different ideologies and people with different backgrounds which give rise to conflicts. People have apprehensions that they will lose their jobs even though those apprehensions have been put to rest by the respected Finance Minister.
• Merger will no doubt result in benefits which are manifolds but technical execution will be a tedious task in itself. Different banks use different software platforms so aligning them with the merged bank will be a tough nut to crack. Financial consolidation along with other financial matters will have to be pondered upon.
• It is said that when the bank becomes oversized, it becomes tough to manage its functioning and in case the bank starts to fall then the entire economy is jeopardized. Although we all are aware of the quote “TOO BIG TO FALL”, in case any big bank/financial institution collapses the entire economy faces the music. 
• In the short run, not only consolidation of PSBs (public sector banks) may divert a significant proportion of management and employee bandwidth away from growth but it may hurt credit growth, stall recoveries and gift market share to private banks. State Bank of India had reported a sharp drop in loan off take after its associate banks were merged. After the merger of SBI and its associates, the SBI management had said that since a large part of energy was invested by its staff into the merger process, monitoring of credit and lending took a back seat. It is clear that the benefits of the mega merger of these ten public sector banks would accrue only beyond two-three years.
• According to the experts, even though the government has allocated additional capital and is pushing for co-lending, there will be a slowdown in loan growth as witnessed in earlier mergers as well which cannot be good at a time when liquidity flow is severely constrained.

Conclusion

The Government has been taking numerous steps at frequent intervals for the betterment of the country. Some of these accrue results immediately and some of them accrue results  after a certain time. The result of this mega merger is a debatable issue and the future will decide the fate of this merger exercise. Currently, COVID-19 pandemic breakout has brought the entire economy on hold and thrown the country out of gear. Let us unite together by staying at home and fight against this evil together.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: