[Answered] “The correlation between size and efficiency can not be fully established.” In light of this critically analyse the outcome of Merger of banks.

It is said that efficiency of an institution depends upon its size, but it’s not always true. A lot of factors determine efficiency of an institution. Same is applicable to banks. In India Public Sector Banks (PSBs) are fragmented and are under the immense pressure of Non Performing Assets (NPAs). Constant failure of banks to provide credit to both emerging and existing industries has resulted in stagnation. Recently government has merged major banks to transform the, into banks of global scale to reap the benefits of economy of scale. Although there are some positives but there are many intrinsic risk involved with merger of banks which need to be considered.

Positive outcome of bank mergers:

1. The merger helps in financial inclusion and broadening the geographical reach of the banking operation. Thus will ensure inclusive and sustainable growth.
2. With number of PSBs coming down after merger, capital allocation, performance milestones, and monitoring would become easier for the government.
3. Large banks through consolidation of PSBs will have large balance sheets which can meet credit needs of growing Indian economy.
4. It will also build capacity in PSBs to raise resources without depending on the state exchequer.
5. Merger leads to availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more in small banks. This will help in reducing NPA issues and would help in better credit services.
6. Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
7. The disparity in wages for bank staff members will get reduced. Service conditions get uniform. Thus it will allow bankers to be motivated to work more efficiently providing banking services at faster and efficient pace.
8. Merger sees a bigger capital base and higher liquidity and that reduces the government’s burden of recapitalising the public sector banks time and again. Thus government can use this public fund for other developmental activities.
9. Redundant posts and designations can be abolished which will lead to financial savings allowing fiscal savings.
10. The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
11. In the global market, the Indian banks will gain greater recognition and higher rating. This will attract foreign investment.

Negative fallout of bank merger:

1. Many banks have a regional audience to cater to and merger destroys the idea of decentralisation. This would hamper credit service in rural areas and may add to NPAs due to inability to manage from centre.
2. Larger banks might be more vulnerable to global economic crises while the smaller ones can survive. A failure of bank would have bigger and larger impact.
3. Merger would burden stronger banks to cover up the the weakness of inefficient banks. This may lead to inefficiencies and delays.
4. Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks.
5. The weaknesses of the small banks may get transferred to the bigger bank also. This was seen during previous amalgamations.
6. Mergers may result in clash of different organisational cultures. Conflicts will arise in the area of systems and processes too.

Bigger banks offer more resilience to the banking sector but overlooking bigger red flags like strong credit appraisal and risk control system would do little help in creating robust banks. Governance of public banks needs to be improved before making any significant change in any emerging architecture. Therefore due focus on ensuring strong foundation of PSBs is important.