Merger refers to collaboration of two or more business entities to form a larger one with  common ownership. Mergers of banks began in India in the 1960s thereby reducing the number from 27 in 2017 to 12  till date. On 30th August 2019, our Honourable Finance Minister, Smt. Nirmala Sitharaman announced the merger of 10 separate Public Sector Banks (PSBs)into four entities which came into effect from April 1,2020. Oriental Bank of Commerce (OBC) and United Bank of India (UBI) merged with the Punjab National Bank (PNB), making PNB the second-largest Public Sector Bank of India with ₹17.95 lakh crore business and 11,437 branches.

Second merger is of Canara Bank & Syndicate Bank, forming Canara bank the fourth largest public sector bank with ₹15.20 lakh crore business and a branch network of 10,324. Andhra Bank and Corporation Bank merged into Union Bank of India forging Union Bank,the India’s fifth largest public sector bank with ₹14.59 lakh crore business and 9,609 branches. In the fourth merger, the Indian bank would be merged with the Allahabad Bank, declaring Allahabad bank the 7th largest Public Sector Bank of India with Rs.8.08 lac crore business and the number of branches would be 6,104.

 Along with consolidation, the government also announced an infusion of ₹55,250 crore towards recapitalization of  the banks to assist them in extending more loans to their customers and meeting crucial regulatory norms.The mega merger has left untouched two national and the four regional banks, namely Bank of India, Central Bank of India, Indian Overseas Bank, Uco Bank, Bank of Maharashtra and Punjab & Sind Bank.These will continue as separate entities as before to meet the economy’s credit requirement while the consolidation activity is underway.

 Nirmala Sitharaman in her public statement said that the “creation of next-generation banks was imperative for India to become a $5 trillion economy in the next five years”. This means that in the long term this consolidation process will improve operational efficiency by reducing the cost of lending, refine governance, ameliorate accountability i.e. Lower capital infusion from the government.

In order to become a 5 trillion economy, India  requires huge investment. If banks have sufficient money to fund big projects hence economic development in the country will speed up. This will increase the geographical recognition of these banks  across the country and internationally. Therefore, Banks which can only dream of Basel III standards can now make it practical and approachable. Basel III is a framework of international banking regulations developed  by the bank during the financial crisis 2008 to reduce damage to the economy by banks that take on excess risks.

Adding on to it, consolidation of the banking sector will also reduce the unhealthy competition prevalent between  banks now and help in better management of banking capital. Mergers will also lead to fewer directorates and faster decision making. In a developing country like India, banks are the cornerstone of the economy as they play an essential role in credit intermediation. Hence, with these mergers, the government aims to create banks that are fewer in fewer in number but larger in size which will help the Centre to assess their performance better, ease credit decisions and facilitate quicker restoration plans to a consortium in the event of default.

 But several glitches and hurdles will crop up in the near future following this  mass integration. Though the Modi government has purportedly said that no one would lose their jobs due to bank mergers,it can be simply seen as a compromise to avoid any trouble from powerful bank employee unions. If there are no layoffs amid the banks merging together, then how will this bank merger legitimize the concept of improved efficiencies and synergies among the banks? 

Closure of branches in the same areas would also lead to employee relocation or even job losses or voluntary retirement schemes. This may eventually create an unemployment situation,subsequent law and order issues and social disturbances. Moreover, there would be several issues including HR/IT synchronisation, streamlining of processes and realigning the NPAs will have an unpropitious impact on profitability in the near-term, as focus shifts from growth/NPA resolution to amalgamation.

 Although the government has not projected the present merger as a measure to tackle bad loans, Will this really end the culture of giving out dubious loans because of political pressures and faulty lending principles? Mergers do not address these serious structural problems as the bad loan recovery process remains slow due to the inefficient judicial system in the country. Therefore, banks are unwilling to aggressively write off bad loans since that would require recognising greater losses.

Considering the issue of political interference in the management of state-owned banks, it has been clearly witnessed that over the years various state-owned banks have been forced to extend loans under political duress even though such loans did not always make business sense. This is in contrast to private banks that are allowed to operate in their own strategies thereby earning profits.

 More importantly, Will the merging of healthy banks with weak banks really improve the health of the banking system as a whole? It is possible that forced mergers will lead to a considerable failure in the overall health of the banking system by adulterating the management of strong banks.

Overall, the infusion of additional capital by the government can temporarily assist banks disturbed by faulty loans to extend loans more certainty due to their precarious capital position.But the merger does not really address the root structural causes behind the woes facing state-owned banks in the country. Still,it is a good beginning and a good strategy to strengthen the financial base of the economy to get into the $5 trillion economy in the next five years.

In a nutshell, although the government’s eventual target of creating preponderant banks is to boost the economy and improve the asset quality of PSBs, however, the timing seems wrong. During this phase of economic slowdown, Mergers will simply divert the management’s attention away from credit growth and NPA reduction while not providing the much-required instant boost to the economy. Amalgamation of banks will add to their NPAs as they themselves are in a vulnerable situation which might further result in weaker balance sheets post merger.

Hence, even though the objective behind this significant movement in the history of Indian banking system is to provide impetus to the slowing economy, it will have several adverse implications in the initial stages.

-This article has been written by Pranjal Ritolia studying Bcom hons. at Shri Ram College of Commerce.

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