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Merger of Indian Banks

/ August 19, 2019

The quest to create large-sized Indian Bank that will adorn in the league of global banks is an old one, and had been continuing since 1991, when Narsimham committee mooted the idea. The committee recommended merger of large Indian banks to make them strong enough for supporting international trade. The suggestion was reinforced by P J Nayak panel in 2014, which recommended either merger or privatization of Public Sector Banks (PSBs).

Merger of PSBs will bestow manifold advantages to Indian economy, which has targeted to become USD 5 trillion economy in the near future. Merger would lead to the following benefits to the highly fragmented banking sector:

  • Boost to businesses
  • Development of technologically innovative products
  • Reduction in operational costs, risks and unhealthy competition
  • Better deployment of staff, resulting in higher profits and effective handling of bad loans or Non-performing assets (NPAs)
  • Newer opportunities for capital generation due to increase in internal resources. This will lead to better control by Government, as they will not need to infuse capital repeatedly. (Since April- 17, Government has already set aside INR 99,476 Cr for recapitalization of PSBs.)

The State Bank of India (SBI) merger (1.4.17) and the Bank of Baroda merger (1.4.19) are two important events to consider. The merger enabled SBI to become the 55th largest bank in the world with balance sheet size of INR 41 lac crore and Bank of Baroda to become the 3rd largest bank in the country with a business of INR 14.86 lac crore.

However, there is a flip side!

  • Weaker banks merging with stronger banks make a negative impact on the balance sheet of the stronger banks
  • Post the BoB merger, the share price of healthier banks like Bank of Baroda and Vijaya Bank fell sharply, whereas that of Dena Bank, a weaker bank, gained.
  • Merger also leads to closure of certain bank branches due to rationalization or relocation, which will impede the progress of Financial Inclusion.
  • In case a large bank incurs huge loss or high NPA, it could have a disastrous impact on entire banking system.
  • Critical challenges of integrating the cultural systems and the accounting systems among the merging banks cannot be undermined.
  • Merge may also impact or delay progression opportunities for some employees, which in turn, can affect the overall morale and service culture.

Despite these cons, merger of banks is a novel idea, which could make the industry stronger and deal effectively with burgeoning NPAs. Even after recent mergers, we are far off from the target of occupying coveted seat among top 10 banks in the world and corner large chunk of international business. Our neighboring country China, supporting the largest population in the world, enjoys the top 3 positions of largest banks in the world.

Anil Tandon

Anil is a senior faculty member with NIIT IFBI.

Professional with 35 years of banking and 7 years of training experience. Anil retired as Deputy General Manager, Allahabad Bank, where he was recognized for establishing first overseas branch of the Bank. Anil has conducted various prestigious programs covering wide spectrum of banking with august institutes like NIIT, NIBSCOM, IIB, IPPB, Amity university and TMI e2E academy.