Decoding The Puzzle Of Indian Banks Merger

There is not an iota of doubt that the Indian banking system is grappling with innumerable challenges. The government, coming to the rescue of the banking sector is known to everyone by now.  And now, it’s quite clear that bank consolidation and bank recapitalisation tops the agenda of the current regime. In the last tenure of the BJP Government, apart from big-bang reforms such as demonetisation and GST being rolled out, one thing that has been very actively carried out is banks merger.

It was with the objective to pull out the banking sector from multiple problems that under the stewardship of former Finance Minister, Arun Jaitley, the Alternative Mechanism or a bench of the minister was appointed in 2017, to fast track consolidation and help to create strong and competitive banks. The plan of a bank merger and consolidation is not the brainchild of the current regime. The Narsimham Committee Report (the first committee on financial sector set up in 1991 and the second on the banking system set up in 1998) recommended the amalgamation between strong banks, because “It would make greater economic and commercial sense and would be a case where the whole is greater than the sum of its part.”

It’s not a hidden fact anymore that bank merger is one of the key policy tools, as lenders try to clean up bad loans. And also merger brings value and efficiency. Now the talks of the merger of Punjab National Bank with other small banks such as Oriental Bank, Syndicate Bank, Andhra Bank are in pipeline. While the talks of Lakshmi Vilas Bank’s merger with India Bulls Housing finance and its subsidiary India bulls commercial credit limited are also underway.

Earlier the government first merged 5 associate banks of SBI with Bhartiya Mahila Bank with effect from April 1, 2017. And with the same effecting date of April 1, 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda. After its successful merger, the number of PSB has come down to 18 from 21.

Also in January this year, LIC acquired 51% stake in IDBI bank, which was a private bank. This step helped IDBI to improve its product offering and efficiency because the bank had reported a net loss of Rs 3,602.49 crore during the September quarter of 2018-19 and was reeling under huge stress due to whooping NPA hitting at 31.78% of the gross advances as on September 30, 2018.

According to Credit Suisse, smaller banks may become acquisition targets. And the merger can overhaul business model, restore liquidity issue. Also, the mergers are beneficial from consumer’s perspective as well; take an example of the recent merger of Bank of Baroda, Vijaya Bank and Dena Bank.  As the Bank of Baroda’s reach is in the northern and western part of the country, whereas Vijaya Bank has a strong foothold in South India. Thus the new entity formed after the merger is All-India bank now catering customers all across India. Also, it combines BOB’s expertise in dealing with very large corporate customers and Dena Bank’s knowledge of MSME customers. Thus after the merger, the efficiency of the bank is boosted up automatically.

But the renowned economists are having very divergent opinions regarding Bank merger. In an exclusive interview to Outlook Money, renowned economist Jayati Ghosh said,

“It’s not clear why this is such a priority area for the government, because there’s no real evidence that mergers improve banks’ cost efficiency on average. Studies of Indian banking have shown that merged banks have not shown better performance indicators.”

Ghosh went on to add that they do typically lead to loss of employment and other adjustments for other staff members who might be relocated to another branch, a different geographic location and into a new line of banking. She also sees mergers as a prelude to further disinvestment and outright privatization. As some loss-making banks are sought to be merged with more profitable banks so as to make them more attractive for private investors

As the market is rife with speculations about mergers that has been priority action area of the government. Now it would be interesting to see that after being at the helm of the nation for second time, what necessary actions the government is going to take in order to pull out the banking sector from the protracted stress.