Bank Merger|Merger of public sector banks

Bank Merger|Merger of public sector banks : Finance Minister Nirmala Sitharaman had recently announced that 10 banks owned by the Government of India would be merged into four big banks with a view to accelerate the economy. After this decision on bank merger, the total number of public banks in the country will come down from 18 to 12. Earlier this year, the government merged Vijaya Bank and Dena Bank with Bank of Baroda. Merger of banks in India is not a new process, but it has a long history in the country. The process of merger of banks has been adopted from time to time to improve the banking system at home and abroad.

What is a merger?

  • Merger refers to a process in which two existing companies combine to form a new and stronger company.
  • The merger usually has the following objectives:
    • Expanding the company’s reach.
    • Expanding the company into new areas.
    • Increase the company’s market share.
  • It is known that a merger is a voluntary fusion of two companies.

Difference between mergers and acquisitions

  • A merger occurs when two separate units come together to form a new joint organization.
  • In contrast, acquisition refers to a situation in which a large entity voluntarily acquires the assets and liabilities of a smaller entity.

Legal provisions relating to merger of banks

Guidelines for merger of banks in India are given under Section 44A of the Banking Regulations Act, 1949. It is noteworthy that merger of banking companies does not require permission from Competition Commission of India-CCI. For the merger of banking companies, it is necessary that at least two-thirds of the shareholders of all parties allow this merger.

Bank Merger
Bank Merger

History of merger of banks in India
The process of bank merger in India started in the 1960s to improve the condition of banks and protect the interests of customers.

  • The year 1969 is considered to be an important year in the Indian banking system, because in this year, the government of Indira Gandhi completely nationalized the country’s 14 private banks, completely changing the country’s banking system. After 1969, 6 private banks of the country were nationalized in the year 1980 also.
  • Statistics from the Indian Banks’ Association show that since 1985, a total of 49 small and big banks have been merged in the country. Some of the important bank mergers in the country are as follows:
    • Punjab National Bank and New India Bank were merged in the year 1993-94, it is notable that it was the merger of the first two national banks in the country.
    • In 2004, the merger of Oriental Bank of Commerce and Global Trust Bank.
    • In 2008, the merger of State Bank of Saurashtra and SBI.
    • SBI and its 5 associate banks merged in the year 2017.

Banking Reforms – Nationalization of Banks

  • Before the 1950s in the world, the banking sector was mainly operated by the private sector.
  • Due to the severe economic loss to the countries involved in the Second World War, the economy of these countries was severely shocked. To overcome this, some banks were nationalized by various countries, especially European countries, so that these countries could get some financial support.
  • The economic condition of India after independence was very poor and the rural-urban gap with poverty was also very high. Despite various efforts of the government, the sector was not improving much. In addition, the Government of India also had a major problem of capital as resources were limited.
  • Keeping in view the above facts, in the year 1969, the government nationalized 14 banks (whose capital was more than Rs 50 crore). Later in 1980 also 6 banks were nationalized.
  • The government has merged some banks from time to time for nationalization of banks as well as for the same purpose.
  • After nationalization, the deteriorating condition of banks improved rapidly. Before 1969, there were only about 8 thousand branches of banks which increased to 60 thousand in the year 1994 and close to 1 lakh 15 thousand in the year 2014.

Advantages of bank merger

  • The main rationale behind merging banks in the country to make them bigger is that this will also enable Indian banks to compete internationally.
  • Merger of banks also reduces their operation cost.
  • This effect makes the NPA management of banks more efficient.
  • The merger also shows an increase in the efficiency of banks.
  • When two or more banks come together, their total assets also increase, which increases their lending capacity and allows them to offer larger loans to customers.
  • It helps public sector banks to raise more resources without the help of state funds.
  • The merger of banks also increases the scope of banking services and customers get easy banking services across the country.
  • Negative competition between banks ends.
  • The government reduces the burden of financing public banks.
  • The smaller the number of banks, the easier it is to control them.
  • Banks are also helped to meet the stringent criteria of BASEL III.
  • As a result, the Indian banking system becomes more powerful.

Merger of Banks and Narasimham Committee

  • In 1991, a high-level committee was formed under the chairmanship of M. Narasimham to improve the banking sector. This committee had said in its report that a four-tier structure should be arranged in the banking sector, which would have three or four big banks. SBI will be involved in this and it will get the top position and it will also be able to do its work internationally.
  • Apart from this, in the year 1998 also another committee was formed by the government under the chairmanship of M. Narasimham. The main function of this committee was to review India’s banking reforms and to make suggestions above. The committee, while presenting its report in April 1998, had also recommended merger of large banks along with several other recommendations.

Bank Merger Downside

  • Experts have always believed that the merger process of banks takes place only on paper, as each bank has its own different work culture and cannot be changed through certain legal proceedings.
  • Bank employees’ unions have always opposed the process of merger of banks, as they believe that the effect of this leads to many bankers to be fired and become unemployed.
  • Large banks may follow monopolistic behavior with increasing market power, resulting in neglect of local requirements.
  • The merger of strong banks and weak banks also weakens the management of strong banks and leads to a significant decline in the health of the overall banking system.
    This can negatively impact the long-term performance of state-owned banks.

Problem of merger of banks and NPA

  • During the financial year 2017-18, the debt recovery situation was so severe that public sector banks had to write off the NPAs worth about Rs 1.2 lakh crore. This means that banks have assumed that these loans will never be recovered.
  • For some time, the situation has been that public sector banks are in discussion only because of their NPAs. In such a situation, it has become a big challenge for the government to take measures to bring public sector banks back on track. Now the question arises whether the problem of NPA can also be addressed by merging banks?
  • On this question, many analysts say that the merger of banks by themselves will not reduce the overall size of bad loans in their accounts. The size of bad loans will decrease when banks are successful in recovering these loans or when these loans are written off from their balance sheets. Due to inadequate judicial system in the country, the process of recovery of bad loans has been slow and banks are not ready to write off their bad debts completely.
  • At the same time, another side also believes that even though this may not reduce the NPA too much, it will definitely increase the NPA management capacity of banks in the future.

Road ahead

The NPA rate of the private sector is much lower than the public sector, as they have made very strict provisions to recover their debt. In such a situation, the public sector should learn from the private sector and tighten the rules for debt collection.
The banking system of the country should change its infrastructure and try to change itself with the changing requirements of the modern era.

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