Mergers/Consolidation of Banks : Boon or Bane?
Background: Banking was not a smooth sail and it had witnessed turbulent times especially with regard to Private Sector Banks. Around 1600 banks were closed down their operations and many of the depositors lost their money during 1913 to 1960s. To address the issue, Banking Regulation Act suitably amended in 1960 to protect the interests of the depositors. Any failed bank would likely to be put on moratorium followed by merger with peer bank. It is a fact that there was no instance where the bank depositor (Public/Private banks) lost a single rupee on account of bank failure in the post nationalisation era. Merger Banks: In the first phase, some mergers have taken place but mostly confined to new generation private sector banks and very little happened on PSBs front. In the past, the amalgamation of banks was primarily triggered by the weak financials where as now the mergers are taking place among healthy banks, driven by business and commercial considerations. However, in the post reform era, majority of mergers happened among Private/Public/RRBs. Merger of RRBs: The initiatives of the government to promote amalgamation of geographically neighbouring Regional Rural Banks (RRB) with in a state with an objective to improve operational efficiency proved success as the number of RRBs have come down from 196 in 2005 to 45 in 2019 and moving forward to consolidate further to 38 by end of the current financial year. Of course, the issues confronted in the RRBs merger process are limited as both the merged entities belong to similar operating and geographical environment. Merger of PSBs: Many small private sector banks got merged with PSBs on account of weak financials during pre and post reform periods. The merger of New Bank of India with Punjab National Bank; State Bank Associates & Bharatiya Mahila Bank with State Bank of India; Dena Bank, Vijaya Bank with Bank of Baroda has unveiled the first round of consolidation of PSBs. The imminent mergers viz., Oriental Bank of Commerce and United Bank of India with Punjab National Bank; Syndicate Bank with Canara Bank; Andhra Bank and Corporation Bank with Union Bank of India; and Allahabad Bank with Indian Bank have unveiled second round of mega mergers among PSBs. The consolidation process was aimed to strengthen the health of the weak PSBs reeling under increased stressed assets and capital inadequacy. Broadly the mergers can be categorized into Compulsive, Forced Mergers and Synergy-Driven. In the past, the merger of banks primarily triggered by the weak financials where as now the mergers are taking place even among the healthy banks driven by business and commercial considerations. Opportunities: i) Economies of Scale: High Volume – Low Margin – High Profit is the Mantra of Present Banking in India. The large scale operations enable the banks to bring down the operation costs substantially and facilitate to offer better interest rates to the customers. To survive in the present competitive market, banks need to improve the operational efficiency which includes cost efficiency and profit efficiency, which is possible only through economies of scale. Similarly, the size offers greater manoeuvrability in enhancing business volume and productivity. ii) Capital Base: Banks need to improve the capital base to tap the potential business opportunities as well as to meet the Basel-III requirements. Further, the adverse business cycles put pressure on the banks on account of increased NPAs thereby the denting the capital for provisioning requirements. Thus, banks need to generate additional capital from its own internal sources besides scouting options for rights/follow-on issues. However, Public Sector Banks face strange situation as the existing guidelines do not permit to dilute equity beyond 51%, thereby the chances for raising funds from market are limited. And also the market conditions are not favourable to go for public issue. On the other hand, the government is unable to provide budgetary support on account of increased fiscal deficit. Hence, consolidation may be a route for PSBs to infuse funds to strengthen their capital base.
iii) Diversified Activities: The improvement in capital will enable the banks to take up new and diversified activities, such as financing equity underwriting, distributing investment and insurance
products, issuing asset-based securities and providing new delivery channels for their products. It provides the opportunity to cross-sell products by leveraging on technology. iv) Risk Spread: Mergers enable the banks to extend the business to various segments at many locations across the country/globe. Hence, the risks are spread across various regions and segments, which protect the Banks from adverse Business Cycles and unexpected financial crisis. Presence in large geographical area paves the way to reduce risks on both asset and liability side. v) Improved Delivery: Shared infrastructure will give customers a wider use of delivery channels such as Branch and ATM network in a most cost effective way. vi) Other Positive Triggers: Technology: Hitherto, technology used to be the major impediment for bank’s mergers as there was no uniformity among banks with regard to adoption of technology. Of late, almost all banks have moved to Core Banking platform and have been operating in technology neutral environment. Standardization: The recent standardization initiatives taken by the Government with regard to recruitment policies, internal promotions, performance appraisals, accounting practices, audit procedures etc., especially among Public Sector Banks will definitely be handy for banks to go for consolidation. HR Practices: Issues such as pay structure, incentives, perks, retirement age, service conditions etc., are also similar to a great extent across PSBs. Regulated environment: In the deregulated environment, banks are free to fix their own interest rates on deposits and advances but in reality more or less the similar interest rates are seen across the banks. In a way, Regulated interest rate regime is in vogue in the deregulated environment, this led for smooth merger process. Challenges - For smooth process of Mergers in the Indian Banking industry, Banks need to focus attention on the following areas: Share value/Swap Ratio: The valuation of Banks is a critical activity since it involves both financial and human assets while arriving swap ratio. Attention must be paid to evolve more realistic and transparent methodology. Identity & Cultural issues: Majority of PSBs have grown from specific regions and have retained certain unique strengths despite some of them coming under the government fold. A merger of such institutions with another bank would whittle down such strengths. Further, there are bound to be problems in the areas of corporate culture, values and approach. Integrating work forces is always a tough task, and any incompatibility in the process may result in gross inefficiencies, defeating the very objective of the mergers. Human Resources are another sensitive issue on the road to consolidation. Mergers make some of the workforce redundant; and banks are forced to undertake large-scale redeployment exercise for effective use of human resources. The anchor bank may be forced to absorb the entire workforce without a commensurate business requirement. It also requires the integration of the heterogeneous work cultures. The views of the employees towards various aspects of the new organization, management styles, training, leadership, etc are to be considered in a critical manner. The varied aspects of the work environment, if not handled properly, may lead to resentment and shrinkage in productivity. Change Management: Managing the merged entity by the management teams drawn from different banks is really a formidable task. Improving the quality of management is yet another challenge for anchor bank. Monopolistic structures: It is a fact that the mergers act as impediment to perfect competition and may give rise to monopolistic structures. In the process, these entities are likely to levy higher fees / service charges to the customers. De-nationalization: The other counter argument with regard to Mergers is that it derails the very objective of Nationalization of Banks. In fact today our country need more number of branches to be opened instead of Merger of Banks to accelerate the Financial Inclusion initiatives thereby Inclusive Growth. The biggest strengths of PSBs are its branch network and trained manpower which require harnessing the said strengths further. The idea of creating bigger banks to take on competition sounds attractive but one must realize even the largest banks through the proposed consolidation are small by global standards. Most importantly, the mergers ignore the fact that beyond a point, the size may not enhance efficiency. Creating behemoths of large banks is likely to add more layers to the organisation structure which may potential lead to bureaucratic culture. Recent Developments: Mergers are supposed to take place through mutual understanding and with the consent of the respective Bank Boards, but the recently concluded mergers and the proposed mega mergers are happening at the instance of government mandate which is against the basic principles of mergers
In order to leverage the benefits of bigger size, geographic expansion, huge loan portfolios, improved technology, product diversification and reduced transaction costs, Indian banks are gradually but surely moving from a cluster of “Large number of Small Banks” to “Small number of Large Banks”. Consolidation will positively amplify the business prospects of the industry in the domestic as well as in the international markets. Thus, it is desirable to look for Synergy Driven Mergers rather than Compulsive/Forced Mergers.
Background: Banking was not a smooth sail and it had witnessed turbulent times especially with regard to Private Sector Banks. Around 1600 banks were closed down their operations and many of the depositors lost their money during 1913 to 1960s. To address the issue, Banking Regulation Act suitably amended in 1960 to protect the interests of the depositors. Any failed bank would likely to be put on moratorium followed by merger with peer bank. It is a fact that there was no instance where the bank depositor (Public/Private banks) lost a single rupee on account of bank failure in the post nationalisation era. Merger Banks: In the first phase, some mergers have taken place but mostly confined to new generation private sector banks and very little happened on PSBs front. In the past, the amalgamation of banks was primarily triggered by the weak financials where as now the mergers are taking place among healthy banks, driven by business and commercial considerations. However, in the post reform era, majority of mergers happened among Private/Public/RRBs. Merger of RRBs: The initiatives of the government to promote amalgamation of geographically neighbouring Regional Rural Banks (RRB) with in a state with an objective to improve operational efficiency proved success as the number of RRBs have come down from 196 in 2005 to 45 in 2019 and moving forward to consolidate further to 38 by end of the current financial year. Of course, the issues confronted in the RRBs merger process are limited as both the merged entities belong to similar operating and geographical environment. Merger of PSBs: Many small private sector banks got merged with PSBs on account of weak financials during pre and post reform periods. The merger of New Bank of India with Punjab National Bank; State Bank Associates & Bharatiya Mahila Bank with State Bank of India; Dena Bank, Vijaya Bank with Bank of Baroda has unveiled the first round of consolidation of PSBs. The imminent mergers viz., Oriental Bank of Commerce and United Bank of India with Punjab National Bank; Syndicate Bank with Canara Bank; Andhra Bank and Corporation Bank with Union Bank of India; and Allahabad Bank with Indian Bank have unveiled second round of mega mergers among PSBs. The consolidation process was aimed to strengthen the health of the weak PSBs reeling under increased stressed assets and capital inadequacy. Broadly the mergers can be categorized into Compulsive, Forced Mergers and Synergy-Driven. In the past, the merger of banks primarily triggered by the weak financials where as now the mergers are taking place even among the healthy banks driven by business and commercial considerations. Opportunities: i) Economies of Scale: High Volume – Low Margin – High Profit is the Mantra of Present Banking in India. The large scale operations enable the banks to bring down the operation costs substantially and facilitate to offer better interest rates to the customers. To survive in the present competitive market, banks need to improve the operational efficiency which includes cost efficiency and profit efficiency, which is possible only through economies of scale. Similarly, the size offers greater manoeuvrability in enhancing business volume and productivity. ii) Capital Base: Banks need to improve the capital base to tap the potential business opportunities as well as to meet the Basel-III requirements. Further, the adverse business cycles put pressure on the banks on account of increased NPAs thereby the denting the capital for provisioning requirements. Thus, banks need to generate additional capital from its own internal sources besides scouting options for rights/follow-on issues. However, Public Sector Banks face strange situation as the existing guidelines do not permit to dilute equity beyond 51%, thereby the chances for raising funds from market are limited. And also the market conditions are not favourable to go for public issue. On the other hand, the government is unable to provide budgetary support on account of increased fiscal deficit. Hence, consolidation may be a route for PSBs to infuse funds to strengthen their capital base.
iii) Diversified Activities: The improvement in capital will enable the banks to take up new and diversified activities, such as financing equity underwriting, distributing investment and insurance
products, issuing asset-based securities and providing new delivery channels for their products. It provides the opportunity to cross-sell products by leveraging on technology. iv) Risk Spread: Mergers enable the banks to extend the business to various segments at many locations across the country/globe. Hence, the risks are spread across various regions and segments, which protect the Banks from adverse Business Cycles and unexpected financial crisis. Presence in large geographical area paves the way to reduce risks on both asset and liability side. v) Improved Delivery: Shared infrastructure will give customers a wider use of delivery channels such as Branch and ATM network in a most cost effective way. vi) Other Positive Triggers: Technology: Hitherto, technology used to be the major impediment for bank’s mergers as there was no uniformity among banks with regard to adoption of technology. Of late, almost all banks have moved to Core Banking platform and have been operating in technology neutral environment. Standardization: The recent standardization initiatives taken by the Government with regard to recruitment policies, internal promotions, performance appraisals, accounting practices, audit procedures etc., especially among Public Sector Banks will definitely be handy for banks to go for consolidation. HR Practices: Issues such as pay structure, incentives, perks, retirement age, service conditions etc., are also similar to a great extent across PSBs. Regulated environment: In the deregulated environment, banks are free to fix their own interest rates on deposits and advances but in reality more or less the similar interest rates are seen across the banks. In a way, Regulated interest rate regime is in vogue in the deregulated environment, this led for smooth merger process. Challenges - For smooth process of Mergers in the Indian Banking industry, Banks need to focus attention on the following areas: Share value/Swap Ratio: The valuation of Banks is a critical activity since it involves both financial and human assets while arriving swap ratio. Attention must be paid to evolve more realistic and transparent methodology. Identity & Cultural issues: Majority of PSBs have grown from specific regions and have retained certain unique strengths despite some of them coming under the government fold. A merger of such institutions with another bank would whittle down such strengths. Further, there are bound to be problems in the areas of corporate culture, values and approach. Integrating work forces is always a tough task, and any incompatibility in the process may result in gross inefficiencies, defeating the very objective of the mergers. Human Resources are another sensitive issue on the road to consolidation. Mergers make some of the workforce redundant; and banks are forced to undertake large-scale redeployment exercise for effective use of human resources. The anchor bank may be forced to absorb the entire workforce without a commensurate business requirement. It also requires the integration of the heterogeneous work cultures. The views of the employees towards various aspects of the new organization, management styles, training, leadership, etc are to be considered in a critical manner. The varied aspects of the work environment, if not handled properly, may lead to resentment and shrinkage in productivity. Change Management: Managing the merged entity by the management teams drawn from different banks is really a formidable task. Improving the quality of management is yet another challenge for anchor bank. Monopolistic structures: It is a fact that the mergers act as impediment to perfect competition and may give rise to monopolistic structures. In the process, these entities are likely to levy higher fees / service charges to the customers. De-nationalization: The other counter argument with regard to Mergers is that it derails the very objective of Nationalization of Banks. In fact today our country need more number of branches to be opened instead of Merger of Banks to accelerate the Financial Inclusion initiatives thereby Inclusive Growth. The biggest strengths of PSBs are its branch network and trained manpower which require harnessing the said strengths further. The idea of creating bigger banks to take on competition sounds attractive but one must realize even the largest banks through the proposed consolidation are small by global standards. Most importantly, the mergers ignore the fact that beyond a point, the size may not enhance efficiency. Creating behemoths of large banks is likely to add more layers to the organisation structure which may potential lead to bureaucratic culture. Recent Developments: Mergers are supposed to take place through mutual understanding and with the consent of the respective Bank Boards, but the recently concluded mergers and the proposed mega mergers are happening at the instance of government mandate which is against the basic principles of mergers
In order to leverage the benefits of bigger size, geographic expansion, huge loan portfolios, improved technology, product diversification and reduced transaction costs, Indian banks are gradually but surely moving from a cluster of “Large number of Small Banks” to “Small number of Large Banks”. Consolidation will positively amplify the business prospects of the industry in the domestic as well as in the international markets. Thus, it is desirable to look for Synergy Driven Mergers rather than Compulsive/Forced Mergers.
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