Merging of Banks: Good or Bad || Tindit India ||

 Author: Pooja Mishra

Recently Government of India merged 10 public sector banks into four large banks. After the mergers, there are 12 public sector banks in India, including State Bank of India and Bank of Baroda. The mega-merger has left untouched six other banks out of which two are national banks and the four have a regional focus. The untouched banks are the Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab & Sind Bank will continue as separate entities as before.

Advantages of Bank Mergers-

• More competent to face global competition. In the global market, the Indian banks will gain greater recognition and a higher rating.
• Reduction in the cost of banking operation.
• Better NPA and Risk management 
• Decisions on High Lending requirements can be taken promptly 
• After the merger, the benefits of the merger are enormous and the biggest is the generation of a brand-new customer base, empowering of business, increased hold in the market share, an opportunity of the technology upgrade. Thus, overall, it proves to be beneficial to the overall Economy 
• Provides better efficiency ratio for business operations as well as banking operations which is beneficial for the economy 
• Minimization of overall risk is there due to mergers and acquisitions which is always good from the business point of view.
• Chances of survival of underperforming banks increase hence customer trust remains intact which is vital for the Economy. The weaker bank gets merged into a stronger one and gets the benefit of large-scale operations. 
• The objectives of financial inclusion and broadening the geographical reach of banking can be achieved better with the merger of large public sector banks and leveraging on their expertise. 
• A larger bank can manage its short- and long-term liquidity better. There will not be any need for overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF). 
•  With a larger capital base and higher liquidity, the burden on the central government to recapitalize the public sector banks, again and again, will come down. 
• Multiple posts of CMD, ED, GM, and Zonal Managers will be abolished, resulting in substantial financial savings.

Problems Arising due to Mergers & Acquisitions in Indian Banking- 

• Compliance needed in every decision which might not be favorable as the thinking perspectives and risk-taking abilities of different organizations is different. It leads to friction and rift which, if not managed well may lead to the downfall of the organization as a whole.
• Risk of failure increases if the executives are not committed enough to bring the merger platforms together for the merging and taking over bank. Such failure may prove brutal for the Economy.  
• The impact of customers on banking mergers or acquisitions is often quite emotional. If customer perception is not managed with frequent and careful communication it may lead to loss of business which is never good for the Economy. 
• Many banks focus on regional banking requirements. With the merger the very purpose of establishing the bank to cater to regional needs is lost. 
• Large bank size may create more problems also. Large global banks had collapsed during the global financial crisis while smaller ones had survived the crisis due to their strengths and focus on micro aspects. 
• With the merger, the weaknesses of the small banks are also transferred to the bigger bank. So far small-scale losses and recapitalization could revive the capital base of small banks. Now if the giant shaped bank books huge loss or incurs high NPAs as it had been incurring, it will be difficult for the entire banking system to sustain.