This article is written by Surya Rose, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
The consolidation of a few Public Sector Banks was the prime news of 2020. The count of Public Sector Banks plummeted to 12 banks. This is indeed a significant reduction. The aftermath of this consolidation is the matter of discussion in this article, particularly dealing with the issues of such mergers.
India is the sixth-largest economy in the world. The Gross Domestic Product of India in the year 2014 is $1.85 Trillion and in 2018 the rate elevated to $2.7 Trillion. The Gross Domestic Product (GDP) reflects how big the economy is. The Government is striving to make India’s GDP rate $5.33 Trillion by 2024. The mega-merger of Public Sector Banks which we will explain eventually here was a step taken by the Government to achieve the $5.33 Trillion economies. Important issues, as well as merits, are described here for readers’ perusal.
A brief history of mergers of public sector banks in India
The nationalization of the State bank of India in 1955 marked the beginning of the Public Sector Banking System in India. The merging history of public sector banks goes back to 2008 when the State Bank of Saurashtra got merged with the State Bank of India. The State Bank of India which was established in 1955 by the nationalization of the Imperial bank of India is the largest bank today. 2010 witnessed the merger of the State bank of Indore with the State Bank of India. The mega-merger of the subsidiaries of the State Bank of India occurred in 2017. In addition, Vijaya Bank and Dena Bank merged with Bank of Baroda in 2019. Another mega-merger is the latest one that occurred in 2020 which is explained subsequently here.
Merger with the State Bank of India
India witnessed in 2017, the mega-merger of the State Bank of India. The State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala, State Bank of Bikaner, and Jaipur and Bhartiya Mahila Bank Ltd merged with State Bank of India.
This made SBI one among the top 50 banks in the world. The merger resulted in achieving Economies of Scale. The increase in the branch network with more qualified employees and effective resources combined with the hike in the price of shares of SBI proved the merger as a successful one.
The mega-merger 2019
On August 30, 2019, the mega-merger of the Public Sector Banks was declared by Nirmala Sitharaman, the Union Finance Minister of the Modi Government which came into effect on 1st of April, 2020. It is noteworthy that in the same year i.e. 2019, the Government had merged Vijaya Bank and Dena Bank with Bank of Baroda.
The table below shows the list of amalgamating banks and anchor banks. After the merger, amalgamating banks disappear and anchor banks continue in existence in a larger size than before the merger.
| Amalgamating Banks | Anchor Banks |
| United Bank of India, Oriental Bank of Commerce | Punjab National bank |
| Syndicate bank | Canara Bank |
| Allahabad Bank | Indian Bank |
| Andhra Bank, Corporation Bank | Union Bank of India |
List of public sector banks post-merger
- State Bank of India,
- UCO Bank,
- Union Bank of India,
- Punjab and Sind Bank,
- Punjab National Bank,
- Indian Overseas Bank,
- Indian Bank,
- Central Bank of India,
- Canara Bank,
- Bank of Maharashtra,
- Bank of India,
- Bank of Baroda.
Issues faced by Indian public sector banks post-merger
Non-performing assets ratio
A problem faced by merging of banks occurs when the Non-Performing Assets ratio is higher in any or all of the merging banks. For instance, the Non-Performing Assets ratio of Bank A is 2% and that of Bank B is 4%. Now, suppose Bank B is merging with Bank A. This of course will enlarge the Non-performing asset ratio of Bank B, and adversely affect its financial health, leading to a problematic situation.
Unemployment of bank employees
Mergers may also cause unemployment of bank employees. Employees may lose their job after the merger due to excess staff or as a part of reducing operating costs.
Managerial efficiency
Forcing a public sector bank to accommodate a weak bank, thereby, absorbing the liabilities, may reduce the managerial efficiency of the strong bank and it can also lead to a reduction in the incentive of the strong bank to perform well. This in turn will affect the overall financial performance of banks.
A merger is not a solution to bring down the number of bad loans. It can worsen the situation sometimes if not properly managed.
Political pressure
Non-performing assets are the major problem of any bank. Treating the cause of it is important rather than giving the burden to a stronger counterpart. Our country has witnessed political interference in what not. So is the case with banks. Many public sector banks are compelled to issue loans under political pressure even by compromising on the various criteria for issuing a loan. This eventually results in a growing number of Non-performing assets. Here, merging can only worsen the situation since merged banks with more lending power now have to issue more loans under political pressure.
The issue faced by customers
Another issue faced is by customers of public sector banks which got merged. The change in Indian Financial System Code (IFSC) blocks many of their funds. Also, old MICR cheques need to be replaced. They have to communicate the same to each of their lenders and that would be time-consuming and problematic. It is also likely that the account number and customer id may also change. Some customers may also face problems in merging their accounts if they have accounts in both transferee and transferor banks in the merger. Now, if they wish to close their accounts, banks may charge closing charges. Sometimes banks have to upgrade their system or technology to accommodate changes after the merger. This is altogether another headache for customers as they may face glitches in online banking and ATM services. Another probable event that may cause hardship to customers is the shut-down of some branches of the amalgamating bank. Customers who rely on such branches and are their home branches find it inappropriate.
Unemployment
The unemployment situation which already is a curse to India will worsen as fresh recruitments may come to a halt at least for some years.
Merits of mergers of public sector banks
The government of India’s determination and endeavour to help the banking sector that was ailing with a high rate of non-performing assets and consequent bad debts damaging its lending capacity paved the way for mega-merger in 2020.
Let’s discuss the merits of the merger one by one.
Recapitalization
Coming to the merits of the merger of Public Sector Sanks, the foremost one is recapitalization. This leads to an increase in capital for lending. Lending is the primary function of any bank. An Enhancement in the lending rate means a rise in deposits. Among the indicators, these are vital in deciding the health of a bank.
New generation banking
Customers can now enjoy more ATMs and the services of next-generation banking. Having to choose from various services provided by new generation banks is indeed appreciable. They can explore their options in investment too. Departure from the traditional banking mechanisms in this technology-driven world is significant. Technical up-gradation on debit/credit cards is another merit. Some merged banks show high Non-performing assets ratio whereas some others show less. For example, the merger of Indian bank and Allahabad bank reflects a low non-performing assets ratio and the merged entity of Union Bank of India with Andhra Bank and Corporation Bank records a high non-performing assets ratio.
Operating cost
Reduction in operating costs is a significant outcome of the merger. This is evident from the merger of the State Bank of India and its subsidiaries. A Decrease in Management cost eventually results in less operation cost.
Shareholders
The impact of the merger on shareholders of Public Sector Banks differs depending on to which bank they get merged with, the non-performing assets ratio, etc.
Global market
The merger of Public Sector Banks results in the enlargement of anchor banks which will eventually aid them to enter the global market. An example of this is the 57th rank of the State Bank of India in the global bank ranking of 2021. The merger also enhances the customer base since the combined entity can now enjoy customers of two or more banks. Getting the benefits of enlargement and enhanced customer base, enable the combined entity to confront competition in the power and capacity of two or more banks. This is indeed better than resisting it in the capacity of a single bank.
Conclusion
Demerits always come with merits. One cannot exist without the other. Making the right decision should always be based on a careful analysis of the two. The Government’s decision on Mega-Merger of Public Sector Banks invited many criticisms. It does have merits and demerits. This article explains both sides of the same coin that is the Mega-merger of 2020. Mergers can result in the economic growth and development of any nation due to their various merits. It also expands a business that is an important goal for any business. Thus tackling the demerits caused by mergers diligently and appropriately helps outweigh them.
References
- https://www.legalserviceindia.com/
- https://www.livemint.com/
- https://www.askbankifsccode.com/blog/list-of-government-banks-india/
- https://economictimes.indiatimes.com/
- https://www.wishfin.com/banks/mega-merger-of-psu-banks-to-enhance-branch-and-atms/
- https://www.oliveboard.in/blog/bank-merger-list/
- https://www.economicsdiscussion.net/india/role-of-public-sector-and-private-sector-in-india/19190
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