All You Need to Know About Public Sector Banks Merger in India

Nationalised banks in India are an important part of the country’s financial infrastructure. The government oversees nationalised banks and they come under the Banking Regulation Act of 1949. Public sector banks have been in the news lately because of certain changes they are undergoing at the moment, namely mergers of two or more banks. This article explores this development in greater detail.

What is a Bank Merger?

A merger or consolidation of banks refers to the procedure of two or more banks pooling their assets and liabilities to become one bank. In this situation, there is an anchor bank and one or more amalgamating banks, where the latter gets merged with the former.

Considering that the public sector banks in India are highly fragmented compared to other key economies, the public sector banks’ merger certainly helps the Indian banks to be in the league of global giants. 

Benefits of Public Sector Banks’ merger

1. One of the most important advantages is that larger banks are capable of facing global competition.
2. It increases capital generation opportunities, both internally and from the market.
3. It leads to a reduced cost of banking operations and a better efficiency ratio.
4. Merger helps in improving NPA and risk management.
5. All merged banks share a common Core Banking Solution, synergizing them technologically.
6. The increased profitability may help raise the standard of living which is very crucial for growing economies like India.
7. The chances of survival of underperforming banks increase and so customer trust remains intact.
8. The objectives of financial inclusion and expanding the geographical reach can be achieved better by merging large PSU banks and leveraging their expertise.

History and Background of Banks’ Merger in India

The merger of banks in India began around the 1960s. It was done to bail out the poor performing banks and protect customers’ interests. As many as 46 mergers took place during the pre-nationalization period (1961-69) to revive weaker banks. This move proved to be successful since the performance of banks improved post mergers. 

During the next few decades government nationalized various private sector banks following the numerous bank mergers between public and private sector banks – some to save weaker banks and some for synergic business growth.

In recent years, there have been at least five mergers of banks in India, which were carried out between various PSU banks. Now, there remain only 12 public sector banks in India after the most recent mega-merger exercise. 

While consolidation of banks is beneficial for customers as well as the overall economy, it comes with massive challenges and raises some serious concerns. Following are some of the key challenges for public sector banks’ merger in India:

1. Tech Integration

These different banks could be seen as asymmetrical entities using different technological platforms and having various geographic reach. Hence, it is important to select the merger partners based on their IT compatibilities over anything else. 

This sometimes leads to a lack of geographical synergy as the geographic reach is overlooked. Then, there are cases where merger partners are using different versions of the same software solution hence it has to be upgraded for seamless integration. Besides, every bank has got a certain level of customization done depending on their needs. Thus, it takes a considerably long time to integrate technology platforms of partners involved.

2. Human Resource

Harmonizing the human resource is another key aspect of these bank mergers. The banks are merged only on papers but their people and culture don’t. Employees of all partner banks often go through the changes in guidelines, policies, designation, and sometimes they get transferred. Ignoring their issues can decrease morale, productivity and may lead to an exodus of key talent. So, several committees are formed to look after various aspects of the merger including HR, IT, and product offerings. 

While the best available benefits from all the banks are passed on to employees, there remain many challenges to deal with.  Apart from job security, different working styles, levels of stress, career-related issues in terms of growth, internal transfers, and pay structures need to be in synchronization. 

3. Other Challenges

• Decision Making

When two banks are being merged, compliance is needed in every decision, which might not be favorable as their risk-taking abilities and thinking perspectives are different. This may lead to friction and rift which, if not managed well can result in the downfall of the organization as a whole.

• Provisions

One of the purposes behind banks’ merger is to bail out poor performing banks. The anchor banks are made to set aside crores for loans to harmonize the bad loan accounts of the banks to be merged and as the ensuing provisions after the merger. A complex merger with an under-capitalized PSB can halt the bank’s recovery efforts and the merged entity may become weak as well.

Conclusion

The consolidation of banks has generally been unfavorable for acquiring banks in the short-term. However, it has proved beneficial in the long-term since it revives the overall business operations and has a positive impact on the economy. Although the integration process is extremely time-consuming and taxing, improvements are visible in best practices, an increase in the number of customers, services offered to customers, and various other banking activities.