Bank Merger

Context

The Finance Ministry has asked four large PSU creditors to explore opportunities for acquisition of small and mid-sized banks with a goal to create global sized lenders.

Key Features

• Large public sector banks (PSBs) like Punjab National Bank, Bank of Baroda, Canara Bank and Bank of India could try looking for potential contenders for acquisition.
• The Indian government in February had decided the merger of these five associate banks with SBI. State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore were merged with SBI, tossing the country’s largest creditor to among the league of top 50 banks in the world. Later inApril 1, 2017thecabinet further approved merger of BMB as well.
• The combined entity will have network of over 24000 branches with ATM serving 50 crore customers.

Issues facing Public Sector Banks

According to a report there are many challenges facing Public Sector Banks that makes them Uncompetitive:-

• Total stressed assets on the books of public sector banks stand at Rs 8.53 lakh crore.
• In comparison, their combined net worth is at Rs 5.69 lakh crore.
• Between 2009 and 2016, the government has already infused about Rs 93,000 crore into public sector banks.
• Now, government intends to pump in Rs 10,000 crore each into public sector banks in financial years 2017-18 and 2018-19. That is creating extra burden on the government treasury.

History

• In the year 1993, the government took a drastic stride towards economic affluence and took a step towards merger of banks.
• The New Bank of India was merged with the Punjab National Bank (PNB). This was the first merger between nationalized banks, ever witnessed in Indian history.
• SBI first merged State Bank of Saurashtra with itself in 2008. Later in 2010, State Bank of Indore was merged with it.

The decision to amalgamate the PSU banks under SBI however, has come with both its Pros and Cons.

Benefits

• Effective utilization of resources: After the amalgamation it can withstand the strong competition from private sector banks and can accumulate more resources to channelize trained manpower across its branches. Secondly in terms of cost cutting, instead of setting up new branches, it can utilize the already existing branches of its child banks.
• Better reachability: Merging with other banks shall result to strong occurrence of a major bank in every nook and corner, which can help to connect with customers from small towns and even rural areas. Further, after the closure of duplicated branches, chances of relocating branches in underserved areas is a possibility.
• Reduced risk of failure: By merging with one of the largest banks, chance of failure or closure of bank is minimal. The larger the bank, the better is the diversification of its assets portfolio and lesser are chances that the bank will flop in the system
• Better projects and investments: With the merger SBI and other major banks will be able to finance more in enormous projects that will lead to economic development of our country.

Shortcomings:

• Job satisfaction of existing Employees: The merger might pose an adverse effect onexisting employees working in small banks as issues like skills, salary, and hikes come into picture.

Merger shall further result to loss of jobs through VRS and stoppage of recruitment which can further complicate things.

• Degradation of bank’s financial health: The dimness and flaws of smaller banks can further adversely impact the health of the bigger banks. The amalgamation of Global Trust Bank with Oriental Bank of Commerce in 2004 is one of the examples.
• General Confusion: There will be some confusion initially.  It will be difficult to recollect the name of the banks which have been grouped together and amalgamated.

Conclusion

Government has been infusing money continuously to help PSBs to come out of the uncompetitive situation and that cannot be the best solution, hence trying new strategies like merger and acquisitions would be a better solution. Government should go ahead with the solution taking care of the challenges coming with that.