Bank Mergers

Introduction:

A merger is the voluntary fusion of two companies into a new legal entity.  It refers to an agreement in which two companies join together to form one company; it is a good business decision both in economic and commercial sense which has a force multiplier effect. It is the amalgamation in the form of assets and liabilities. The only principle behind the merger is simple: 2+2= 5. The value of company A is $2 million and the value of company B is $2 million, but when we merge these two companies, we will have a total value of $5 million because the merger of two companies creates additional value which is the synergy value, meaning thereby the whole is greater than the sum of its parties. Synergy value obtained from:

1. Revenues: By combining the two companies, higher revenues can be created than if the two companies operate separately.
2. Expenses: Expenses in the form cost of operations, infrastructure, and elimination of redundant activities such as Human recourse, Accounting, Information Technology can be reduced.
3. Cost of Capital: By combining the two companies, the overall cost of capital can be reduced.

Mergers have the strategic reasons. The business combinations are done:

• Positioning: Mergers help the companies to obtain more market share and to enjoy the advantages of scale of operations. A combination of the companies helps to grab the future opportunities that can be exploited when two companies operate separately.
• Organizational Competencies:  Combination of human resources, technology can help in the innovative thinking and development within the company.
• Gap Filling: One company may have a weakness (less market share) and other companies facing the innovation issues, the combination of innovative ideas and a large market share will help them to survive in the market for the longer term and helps to boost poor performance.
• Broader Market Access: Large scale may help in quick access in the global markets.
• Diversification: Smooth earning, consistent long term growth and profitability can help to expand and diversify the business.

Merger and Acquisition are the two misunderstood terms in the business world. Both terms are for the consolidation of the companies but there is a difference. Merger is the combination of two companies whereas Acquisition is the takeover by the other entity.

Types of Merger

Vertical	When two companies operating at different stages of production and distribution within the same industry.
Horizontal	When two companies operate in the same industry and the same lines of business.
Conglomerate	When two companies are not related to each other, neither horizontally not vertically.
Reverse	Wherein public listed company is merging with the privately held company.
Co-generic	When companies undergoing mergers operate in the same or related industry, however, their product lines are different.

History of Bank Merger in India

In 2016, Finance Minister Arun Jaitley proposed the Budget road map for consolidation among PSBs and suggested the need to reduce the current number 27 to 8-10 global sized banks. The country’s largest bank State Bank of India sought to be merged with its five associate banks and three-year-old Bharatiya Mahila Bank with itself. In 2019 Bank of Baroda, Vijaya Bank, and Dena Bank was merged to become India’s third-largest public bank. These major mergers took take without any major disruptions to human resources as well as to the customers. In 2019, Nirmala Sitaraman announced an economy booster package to reduce the slowdown in the economy. Five trillion GDP target is set up by the Modi Government to be achieved by 2024 which means to grow at 9%. The target is planned to be achieved through reforms, financial strength, technology, consolidation & strong governance in the financial sector. Economic reforms were decided to be introduced in three parts, the second part deals with the merger of PSBs as a GDP tank. Consolidation PSBs were given the name as Mega-Merger of PSU Banks which came into the force from April 1, 2020. The biggest ever consolidation in the public sector banking space, in which ten public sector banks were decided to be merged into four. With the merger bank, 2500 rupees crore is estimated as synergy benefits in the next three years.

Let’s understand the clear picture of the public bank sector.

In 2017 there were 27 PSBs but after the consolidation that is in 2020, we have a total of 12 public banks out of which seven are large sector banks and five smaller ones. These 12 banks have merged into the four anchor banks- PNB, Canara Bank, Union Bank, and Indian Bank.

PNB	Oriental Bank of Commerce (OBC) and United Bank of India (UBI) have merged into Punjab National Bank (PNB). The move will make PNB as the second-largest public sector bank of India after SBI.
Canara Bank	Syndicate Bank has merged with Canara Bank, creating India’s fourth-largest public sector bank.
Union Bank of India	Andhra and Corporation Bank will be merged into Union Bank of India.
Indian Bank	Allahabad Bank into the Indian Bank.

These 11 banks + Bank of Baroda which has already been merged in 2019 will only in existence from 2020. Government of India while deciding the combination of banks considered the key factor of technology, every bank as its software, only banks having the same or likely same were combined.

A merger of the bank will render the changes, let’s have look at its implications, and how it would affect the customers, employees, and overall contribution in the GDP, and its implications which is the sole purpose behind the merging of banks.

Merits of Bank Mergers

1. Cost of Operations: Bank mergers will result in capturing the larger market share and hence reducing the cost of operations. It will help to reduce the need for human resources, IT, office infrastructure. Creativity can be enhanced by combing manpower and technology, more rational and effective decisions can be taken.
2. Geographical Reach: There are still many areas with no bank connections. The bigger footprint will help to serve more customers and more financial inclusion
3. NPA: Public banks were facing the major issue of Non-Profit Assets; merger may help to solve this problem. Merger eases the supervisory management responsibility.
4. Filling the Gap: Small banks may face many issues like consultancy, net banking merger may cover all these gaps. It also reduce the wage disparity and make the services condition uniform for all banks. Merging small banks with relatively strong banks is a step for betterment.
5. Zero Disruption: The government tried to implement the mergers with zero disruption for employees.

Bank mergers would reduce the burden on the government as from the last few years the government is recapitalized the PSBs, mergers enable large banks to do better itself and it will help Indian public banks to enter into the International markets and to take large projects.

Despite the advantages claimed by the government for the bank merger, there are many valid criticisms behind this step.

Demerits of Bank Mergers

1. Implication:  One of the criticisms of the bank merger is the implication.  Every bank has its software and cultures in terms of loans and interest rates. Merging banks would be a big burden on the banks. It may take even three years to complete their paperwork and other formalities spoiling the entire idea of decentralization.
2. Too Big to Fail: Combining weak banks into the other weak bank will create a big weak bank. While large banks are always supposed to absorb the more losses than the small one but with the more NPAs and other inefficiencies can prove as a burden on the anchor banks and hence its risk to fail. Failures are the essence of capitalization so, the need to fail safely is very important to avoid the shocks like Lehman Brothers 2008.
3. Disguised Unemployment: In a country where unemployment is a big issue, merging the banks create the problem of overstaffing which is the challenge for employees and further create fewer new jobs too.

PSBs rendered commendable service to the nation by deepening bank penetration into the

hinterland and implementing a variety of anti-poverty programmers and many others in these 50 years. This merger may affect the current performance than contributing to the new targets.

Bank Merger for Customers

Money in the public is always safe with or without a merger. Customers’ interest was duly considered in the merger. The small things that the customer needs to do are change cheque books, account no, customer IDs, and IFSC code and re-submission of account details for auto-credits/debits cards. For loans, the bank having lower rates is applicable for the interest rate irrespective of the account holder bank.

Conclusion

A well-functioning financial system is fundamental to a modern economy. Solid banking system is required to achieve the targets and we cannot be a $5 trillion economy unless the banking system supports this growth. This support comes from the banking system only if credit flow keeps on continuing and that credit flow keeps in a circle only if the bank is large and able to deploy the funds more efficiently which bolsters the bank’s ability to lend across industries. Industries can only grow if there is availability of credit which is the major contributor in the economy. However the bad governance cannot be solved just by merging the banks, other steps should also be taken to improve the banking sector in India. However, the effects of this merger are difficult to estimate at this first quarter and especially when the entire country is facing lockdown due to Covid-19.