Earlier this year on April 1st, 2020 – a consolidation or what we call merging of banks happened – which is in essence what the media is calling a mega bank merger. A merger in simple terms is combining two banks – but it isn’t as easy as it sounds! There are so many things that change with these mergers. A merger combines loans, capital, cultures, and human resources! Yep. If you work in a bank, good chances you might end up working with that annoying dude next door after a merger.
Anyway, through the way of this article we want to shed some light on the mega-mergers that happened near the end of March. We’ll be discussing the “why” of these mergers, essentially understanding the possible advantages and disadvantages.
27 – This was the number of Public sector banks back in 2017, today after the merger there are just 12 Public sector banks. The recent mega-merger included consolidating 10 major banks into 4 as mentioned below. To simplify this, the bank at the top in every team is called the Anchor bank (say team captain) and the other bank(s) are called the merging bank (say, team players).
Why the Mega Bank Merger?
In the very simple of the terms: Cross-functional utilization. Again, to simplify this, let’s understand this by the composition of a football team – where the government is the captain. Everyone in your team is playing independently – they all have one good skill (say someone is a striker, a goalkeeper, etc.), but that one good skill is doing them no good. And so, you decide to combine these players in a set of 4 different teams to better utilize their capabilities.
These mergers became absolutely essential owing to the ongoing slowdown in the country. The Economy of India was growing at a mere 5% in the April-June quarter of 2019, recording the weakest pace in over six years. Adding to that, there were increasing cases of loan defaults and non-performing assets, plus the low profitability of banks was rising in public sector banks. All of this forced the government to come up with a series of financial reforms and essentially mergers.
The government analyzed the efficiencies and long-term profits of merging banks (recall our team example above), this combination was poised to provide the country with growing financial base and act as a catalyst towards the economy of USD 5 trillion. The decision was also poised to result in better professional governance structure and greater accountability of bank boards. Analysts also predicted a 7% growth in the overall GDP of India. Yikes! But looks like CoVID had different plans?
The merger took effect from 1st April 2020 amid coronavirus lockdown in the country – total badass! Now obviously, the mergers weren’t really going to be as smooth as calculated. However, owing to the confidence of the leadership of these banks, all worked out!
- Cost of Operation will be reduced which will result in better output (following the principle of Economies of scale)
- Since there is a lack of efficient experts in smaller banks, this merger will provide the necessary brainpower in order to ensure that the right expertise is available to them
- NPAs will be reduced with right risk management and thus improving performance
- The burden of recapitalizing PSBs from time to time will be lowered. In simple terms, just like you recharge your phone with an unlimited pack and then you don’t have to worry for a month. The Government won’t have to pump in cash again and again into these smaller banks
- Since the merging entity involves 2 or more banks, the government would pay closer attention to improve operations and corporate governance, leading to lesser chances of its defaulting
- Too big to fail risk (read 2008 financial crisis). Basically, means after you merge these banks, you also merge their customers and failing of this one big bank will result in the loss of more customers than before
- Merging the Legal, Technological and HR structure of these banks is going to be a challenge
- Confusion among the customers – especially the rural lots. Lack of proper instructions could cause these people time
Related: Take a look at the case study of 2008 Financial crisis
Some possible confusion
With the last point said, we’re sure there will be customers who would’ve faced some confusion with post mergers. Concerns like: what is going to happen to their accounts and debit cards? And do they have to redo the entire process of account opening with Anchor bank? To answer all these questions, FAQ pages were released. Such pages released by all merged banks are given below for the reference:
- PNB bank + OBC + United Bank
- Canara bank + Syndicate Bank
- Union Bank + Andhra bank + Corporation bank
- Indian bank + Allahabad bank
Finally, the best stuff for last. For employees of merging banks, the government has assured that no one is going to lose their jobs. They firmly stated this by giving the example of the previous merger of Dena Bank and Vijaya Bank with Bank of Baroda, where they retained all the employees.