Bank Mergers - Policy for Poor or Poor Policy?

                                  Amalgamation and Mergers of Public Sector Banks
                                                  History and its implications

             The banking sector is important in any economy because it fuels an economy with monetary support. Our banking sector is in a severe crisis where only our banking system was sustained in the 2008 financial crisis when all other countries banking systems were struggling with crises. Any development reform in this sector will entirely boost the economy, and here we have to notice the importance of properly implementing those reforms because the improper implementation of this program leads to serious economic disasters.

               Bank mergers are not new in India as it was started even before independence when the Bank of Calcutta, Bank of Bengal, and Bank of Madras were merged in the year 1921 to form the Imperial Bank of India under the British Government, which was later renamed into State bank of India after independence. The important reasons for many mergers are to avoid losses. SBI amalgamated and merged many associate banks and other public sector banks into themselves to rescue them from crises. The first amalgamation and merger (A&M) between public sector banks happened in 1993 between the New Bank of India and Punjab National Bank. And in the year 2017 government of India merged the Bank of Baroda with Vijaya Bank and Dena Bank. This decision was to increase the loan amount and reduce the NPAs. 

              The Finance Ministry recently announced the second-largest bank merger after the government came into power in the 2019 elections. With the recent announcement, the number of banks in India reduced to 12 from 27.  The Indian government introduced the recent reforms as part of corrective programs against the slow growth rate of 5%, which is the lowest in the last 6 years. It was not a sudden decision as the government already announced its plan to start EASE 2.0(Enhanced Access and Service Excellence) in June to bring the second round of reforms in public sector banks, including recapitalization and A&M in PSBs. These are the measure to increase consumer and investment confidence in the economy.

                  Many implications revolve around this decision because it is announced to improve the economy during the slow growth. Many PCBs (Public Sector Banks) are under the NPA traps, and many others have capital adequacy problems. This move of the government can help the banks to overcome them. Even the Reserve Bank of India started the Prompt Corrective Action (PAC) to assist banks trapped with high NPA accounts. While announcing the Bank Mergers, the finance minister Shri Nirmala Sitharaman announced that this decision was taken to expand the reach and scale up the operations of PCBs. Earlier in September 2018, the government announced the merger of Dena Bank and Vijaya Bank with Bank of Baroda, but its benefits are not out till now.

                 With the mergers of banks, they will have a broader geographical presence which helps to connect with large sections of people and increase loan value as the banks' capital is combined. This will help the MSMEs and Start Up's as they can get a high loan from the banks for their business. They can reach the people quickly and boost the economy with new businesses. The new entrepreneurs used to go to 2-3 banks to get the required money for their business; now, it is simplified. 

              But here raises another problem of customer impact and perception: some people are closer to regional banks than those operating from other places. For example, Andhra Bank has a high presence in Telugu-speaking states, where now its merger with the Union Bank may have a different relationship than people have with the earlier one. Same with the Allahabad Bank. This may cause some initial pressure. So, while dealing with mergers, the authorities should have to take care that the core ideas are only disturbed if they are the reason for the slowdown.

              Another important concern regarding the A&M (Amalgamation and Merger) is the cultural fit of the employees, who are the important base of the bank. They should be properly convinced during the A&M as they are under different leadership until then, and the pressure on them will be higher during the merger. Also, HR should try to convince employers the other way. Staff rationalization is another big problem. When the government supports its move by saying that the newly merged bank will compete with the international bank, but that needs border vision and more reforms.

                

Update: After 5 years, the amalgamated banks have adjusted to the government's decision and restructured their functioning. It goes by the saying, "To improve is to change; to be perfect is to change often." -Winston Churchill. But the government's calculation has surely left many in trouble for the time being to adjust to changing governance which the state should consider in its future actions.

- Narayana M.CH
  BA Social Sciences, 

  Tata Institute of Social Sciences,

  9370818268
  t2018ba032@tiss.edu