Banking Mergers In India
Bank Mergers in India: All You Need to Know
In a move to redefine and restructure the country’s financial institutions, the PJ Nayak Panel in 2014 recommended privatising state-run banks to lighten the burden on the government. Since state and public sector banks (PSBs) depend on government aid to stay functional, merging multiple small and public banks into a global-sized bank helps to improve operational efficiency and widens the reach of the government bank across the country.
PSBs and state banks have a firm footing in their region, and merging these banks into one unit helps to increase the branch network as per the RBI; this will help to revamp India’s banking system, creating global, robust, and well-funded banking institutions.
Taking from this recommendation, the Government of India in August 2019, announced a mega-merger of 10 public sector undertaking (PSU) banks into four. This decision was conveyed to the cabinet’s approval by India’s Finance Minister Shri Nirmala Sitaraman. She also said that the merger would take place after the boards of the banks have met and decided on how to take the proceedings further. As per her statement on 28th March 2020, the mergers would take effect from 1st April 2020.
Are banks’ mergers and acquisitions in India a good thing? Will it impact existing shareholders, account holders, and the banking staff? What is the list of mergers of banks in India that this decision will impact? We answer these in this guide.
What Does a Bank Merger Refer To?
A bank merger in India refers to an agreement between the acquiring bank and the merged bank, which entitles the combined banks to share their assets and liabilities, essentially becoming a single entity. Post the merger, the acquirer bank takes over the acquired bank and will be known by one name rather than remaining independent. In rare cases, the post-merger banks will form a newly chartered bank with a new name.
This merger helps smaller banks gain access to higher financial assets and advanced technology. At the same time, the economy is benefitted as it reduces the competition among the key players in the same industry. The mergers help create a single entity that can reduce and avert financial distress and lead to the combining firms exchanging information about debts, finances, technology, properties, and other things.
What Are the Challenges That Happen Due to Bank Mergers?
- Although bank mergers in India will ensure that the need for capital from the central government is lower in PSBs, the capital infusion will be relatively higher if there is a need for capital.
- Merging with smaller banks could expose the acquiring bank to governance-related issues.
- Since NPAs of small and larger banks will be merged, the pressure on the acquiring entity will be higher.
- The staff of the acquired bank and the acquiring bank will need to have proper handholding, with the culture of the merging entities being merged. Since acquisition means merging several departments and staff across PSBs, it could lead to issues on a managerial level or other differences that can lead to the downfall of the entire organisation.
- The bank merger in India can also have an emotional impact on the customers, as it leads to a lot of fear in the mind of the customers.
- Recapitalising a small bank is much easier compared to a larger bank. Since the merger will mean all the existing NPAs and risks will be merged with the more significant entity, any resultant recapitalising requirement will be much higher and can take a toll on the country’s economy. The banking system will have to face the consequences due to this move.
List of Bank Mergers in India
After the mergers announced by Union Finance Minister Nirmala Sitaraman in 2019 and notified through a circular by the RBI on 1st April 2020, the amalgamation of the PSBs was determined based on bad loans and regional factors at play. Since the mergers, there are now 12 PSBs in India, including the State Bank of India and the Bank of Baroda. This is down from the 27 PSBs that existed in 2017 and is done in an effort to create 3-4 top global-sized banks in India.
Here are the updates on the recent bank mergers in India and how they impacted the banking sector:
|Name of Acquiring Bank||Name of Banks Merged||Additional Information|
|Punjab National Bank (PNB)||
||The Punjab National Bank acquired the Oriental Bank of Commerce (OBC) and the United Bank of India (UBI) to become India’s second-largest public sector bank in terms of branch network, trailing only after the State Bank of India (SBI). PNB has 11,437 outlets post-merger, and the bank’s overall business is Rs. 17.95 lakh crores.|
|Canara Bank||Syndicate Bank||Canara Bank acquired Syndicate Bank to become the fourth-largest public sector bank in India. The branch strength of Canara Bank was brought to 10,342, with a total of 89,885 employees. The net NPA ratio for the post-merger bank is 8.77%, and the combined business will be Rs. 15.20 lakh crores. For this deal, the Government of India provided Rs. 6500 crores in capital to Canara Bank.|
|Union Bank of India||
||The Union Bank of India acquired Andhra Bank and Corporation Bank, becoming the 5th largest PSB post the merger. The combined business base of the merged banks will be Rs. 14.59 lakh crore, with a net NPA of 6.85%. The Government of India provided Rs. 11,700 crores to UBI to facilitate this merger.|
|Indian Bank||Allahabad Bank||The Indian Bank merged with Allahabad Bank and, post-merger became the seventh-largest PSB. The combined business of the bank will be Rs. 8.07 lakh crore, and the total NPA ratio of the Indian Bank is now 3.75%. The bank got Rs. 2500 crore worth of capital from the Indian government to complete this merger.|
|Bank of Baroda||
||On 1st April 2022, the Bank of Baroda (BoB) acquired Vijaya Bank and Dena Bank, bringing the combined employee count to 85,675 and total branches to 9500+. The three-way consolidation was done to improve profitability, adopt best technology practices across amalgamating entities and improve cost efficiency, risk management, and financial inclusion among the banks.|
|State Bank of India||
||The State Bank of India was merged with the Bharatiya Mahila bank and its associate banks in 2017, and this consolidation brought its total branches to 22,500+ with a network of 58,000+ ATMs. The SBI group now has an asset base of Rs. 37 lakh crores and will have a consolidated customer base of 50 crores.|
|HDFC Bank||HDFC||HDFC, on 4th April 2022 announced that it would merge into HDFC Bank, a move that was made to consolidate its market capitalization, making it the third-largest entity in India.|
Bank Mergers in India resulted in several public sector banks being pooled into 4 PSU banks. However, while the above entities merged as per the directive, Bank of Maharashtra, Indian Overseas Bank, UCO Bank, Punjab & Sind Bank, Bank of India, and Central Bank of India are the 6 banks that will remain independent entities.
How Do Bank Mergers Impact Customers?
Although there are no significant impacts on banking customers for the acquired bank, some of the changes that will take place due to bank mergers in India include the following:
- Change in bank account number, customer ID, and IFSC code
- The chequebook will have to be replaced with that of the new bank.
- The rate of investments and loans on prevailing schemes would remain unchanged, but the new schemes can be launched, and some existing ones can be closed.
- After the acquisition, existing loans will be transferred to the merged bank, and borrowers will have to continue paying their EMI to the new bank.
- Some existing bank branches could be closed down depending on the rationale and presence of the acquiring bank.
- Debit and credit cards of the merged bank will have to be exchanged with the merged entity.
- Customers of the acquired bank will automatically get access to the network of the acquiring bank and vice versa.
What Are the Benefits and Drawbacks of Banking Mergers in India?
Bank mergers in India help increase the volume of assets and liabilities as the acquirer bank gets access to all the customers and networks of the acquired bank. This comes with several merits and demerits.
Some of the benefits of bank mergers in India include the following:
- Increased financial inclusion as the central banking authority can now spread its network to reach every nook and corner of the country where the regional or PSU bank has a presence in
- Elimination of wage disparity between small banks and large PSUs
- Reduction in operational costs
- Availability of technology and technical expertise for the smaller banks, improving efficiency, net banking, and other features for the acquired bank.
- Minimisation of costs and overheads by removal of unnecessary posts and administrative expenses
- Improved product range and the broader option of financial instruments for the customers
- Reduced dependence on government funds since the larger PSU bank has its own funds to fall back on, reducing the need for Government to infuse funds into public banks.
- Implementation of stringent policies and central authority on region-centric banks, helping lower the instances of fraud or bad loans.
Drawbacks of Bank Mergers in India
Though there are several merits of Bank mergers in India, the demerits cannot be ruled out. Some of the drawbacks of bank mergers and acquisitions in India include the following:
- Most banks operate with region-centric strategies that give them an edge over other global banks. Mergers and acquisitions defeat the purpose of decentralization.
- The larger banks are usually significantly impacted by global trends and financial crises, which the smaller banks can easily escape given their localized strategy. Banks mergers and acquisitions in India dilute this, and even smaller banks that could escape the impacts of global financial trends are now caught in it.
- Larger banks usually have greater pressure on performance, and given the high volume of NPAs, this pressure is too much for the smaller banks to take on.
- Bad loans and governance issues are not just inherent to small banks. Many larger banks have similar issues, and mergers will not automatically solve this problem.
- Banking staff faces the uncertainty of their jobs as acquisitions are usually followed by many team members being removed. This can lead to changes in the working and internal guidelines of the bank and result in delays or problems.
Rbi’s Retrospective Take on Bank Mergers in India
In the Financial Stability Report (FSR) released in 2022, the RBI found that the merged PSBs were riskier than unmarked ones. The RBI found a decreased risk in the banking sector in 2021 compared to the peak of the pandemic in 2020, and the body stated that the systemic threat posed by a state-run bank was higher than by private players.
Although bank mergers in India are supposed to achieve greater efficiency for the merged entity, revitalize the banking system, and ease the pressure on government funding for these banks, the effectiveness of the merger depends on how well the post-merger scenario is handled and processes implemented in the banks.
Frequently Asked Questions (FAQs)
How many public sector banks existed in India, and how many are there now after the merger?
In India, there were 27 Public Sector Banks. But after the bank mergers in India was announced in 2019, there are 12 PSBs. These include Bank of India, Bank of Baroda, Bank of Maharashtra, Canara bank, Central Bank of India, Indian Bank, Indian Overseas Bank, Punjab National Bank, Punjab & Sind Bank, Union Bank of India, UCO Bank, and State Bank of India.
Which banks have merged with the State Bank of India?
During the bank mergers in India, the banks that were merged with the mammoth State Bank of India include the State Bank of Travancore, State Bank of Hyderabad, State Bank of Mysore, State Bank of Bikaner and Jaipur, State Bank of Patiala, and Bharatiya Manila Bank.
Which independent public sector banks exist in India post-merger?
Post the bank mergers in India that happened in 2020; six PSBs will remain independent. These include - The Indian Overseas Bank, UCO Bank, Bank of Maharashtra, Punjab & Sind Bank, Bank of India, and Central Bank of India.
When did the most recent bank merger take place in India?
The most recent bank mergers in India took place in 2020, wherein the Government of India oversaw the merger plan for 10 public banks into four. Finance Minister Nirmala Sitaraman announced that this merger would help manage the capital more efficiently and help bring down the boat loans ratio and regional factors. The banks that were merged include Punjab National Bank, which merged with Oriental Bank of Commerce and United Bank of India; Canara Bank’s takeover of Syndicate Bank; Union Bank, incorporating Andhra Bank and Corporation Bank; and Indian Bank, which merged with Allahabad Bank.
What are the main objectives of bank mergers in India?
The key objective of the bank mergers in India include:
- Access to technology and resources for the acquired bank since the acquiring bank with higher funds usually has advanced technology and banking features.
- Improved service devilry
- A larger capital base helps acquirer banks offer a larger loan amount and helps them better mitigate existing NPAs.
- Bank mergers help the ministry to better focus on the limited banks and maintain scrutiny on the PSBs for any wrongdoings.
- Better internal processes, technological upgrades, and financial inclusion
- Improve overall economy, profitability and efficiency with a widened branch network.
Is bank mergers in India a new phenomenon?
No. Bank mergers in India have been happening since pre-independence, and the first merger occurred in 1921, when the Bank of Bengal, Bank of Bombay, and the Bank of Madras were merged with what is today known as the State Bank of India.