Merger of Public Sector Banks in India – An Impact

Study

By
Mukund Maruti Mundargi
M.Com., MBA, M.Phil., Ph.D.
Assistant Professor of Commerce
Rani Chennamma University, P.G. Center, Vijayapur (Toravi)

ABSTRACT

The merger of ten public sector banks into four was announced
by the Finance Minister of India on 30 th August 2019 by bringing down
the number of Nationalized Public Sector banks to 12 from 27 in 2017.
The Government of India will provide capital infusion of Rs. 55,250
crore in the current fiscal. The merger of these banks would help reduce
cost, boost efficiency and achieve scale economy. The First Group of
merged banks comprised of Punjab National Bank, The Oriental Bank
of Commerce and United Bank of India. The Second Group of merged
banks included Canara Bank and Syndicate Bank. The Third Group
comprised of Union Bank, Corporation Bank and Andhra Bank. The
Fourth Group comprised of Indian Bank and Allahabad Bank. Main
arguments in favour of bank merger related to (1) Large capital base of
merged banks will help in disbursing larger number of loans of higher
magnitude; (2) Cost reduction through operational efficiency; (3)
Reduction in the need for recapitalization from the Government and
(4) More scope for better adoption of Technology.
Arguments against the bank merger related to (1) Difficulties of
management of human resources, (2) Few large interlinked banks
expose the broader economy to enhanced financial risks and (3) Local
identity of small banks will be lost. The evidence of previous bank
mergers failings to secure the expected benefits have been cited by
critics of the present merger of banks by the Government. Further the
perceived benefit of reduction of NPAs through bank mergers have
been contested by market economists and bank management
administrators. The study has probed these various aspects of pros
and cons of the recent merger of the public sector banks in India.
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 Merger of Public Sector Banks in India – An Impact
Study

By
Mukund Maruti Mundargi
M.Com., MBA, M.Phil., Ph.D.
Assistant Professor of Commerce
Rani Chennamma University, P.G. Center, Vijayapur (Toravi)

Introduction

The merger / amalgamation of 10 public sector banks into four

was announced on 30th August 2019 by the Finance Minister of India.

This exercise will create six global size banks and brings down the

number of Nationalised Public Sector Banks to 12 from 27 in 2017.

These 10 banks will receive capital infusion of Rs. 55,250 crore from

the Government in the current fiscal. The government hopes that the

consolidation of banks will help reduce costs, boost efficiency and

achieve scale economies.

The Basis of Merger/Consolidation

It is contended that the grouping of the banks was principally

based on the core banking platforms used by them and their capital

adequacy position.

1. The First Group comprised of the Punjab National Bank, the

Oriental Bank of Commerce and United Bank of India. This merger

will create the second largest bank in the public sector. This group

use the Finacle technology platform.

2. The Second Group is created by merger of Canara Bank and

Syndicate Bank on the iflex core banking platform.

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3. The Third Group comprises of Union Bank, Corporation Bank and

Andhra Bank and operates on Finacle. It will be the fifth largest

public sector bank after the merger.

4. Fourth Group comprises of Indian Bank and Allahabad Bank using

BaNCS platform.

Conventional Arguments for Merger or Amalgamation of Banks

Major arguments in favour of the bank amalgamation resorted

to by the Government of India relate to the following.

1. A large capital base would equip the merged banks to disburse a

larger number of loans and of higher magnitude.

2. Operational efficiency of the merged units will reduce costs.

3. The need for recapitalization from the government will reduce and

4. There will be scope for better adoption of Technology.

The merger of the 10 public sector banks into 4 entities is

supposed to create operational efficiency and help optimize the

resources. Further customers will benefit the most, as loan rates will

come down over these efficiencies according to Mukesh Kumar Jain.1

The merger of the bank leading to consolidation will help create strong

and globally competitive banks with economies of scale and enable

realization of wide ranging synergies according to Rajiv Kumar. 2 It is

argued that to support the next level of growth the country needed big

banks. India will have six mega banks with enhanced capital base,

size, scale and efficiency to support high growth that the country

requires to break into middle income nations.

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 The Finance Minister Nirmala Sitaraman observed that “These

12 solidly present, well consolidated energized adequately capital

endowed banks will now operate to target $ 5 trillion economy and

give necessary support for banking facilities required by our

customers”.

Contesting Arguments Against the Bank Merger

The arguments in favour of bank merger leading to the major

economies of operational costs and scale economies have been

contested by market economists and experts contending that the past

bank mergers neither revived credit growth nor led to any meaningful

cost reductions. Major arguments against this merger/consolidation

of the banks relate to the following areas.

1. It would be tough to manage issues pertaining to human resources.

2. Having only a few large interlinked banks can expose the broader

economy to enhanced financial risks and

3. The local identity of small banks will be lost leading to ramifications

in the social and cultural space that are often not recognized or

understood.

Finance Minister asserted that the proposed big banks after

merger would be able to compete globally and improve their

operational efficiency once they lower their cost of lending and

improve lending. However none of India’s banks including State Bank

of India which is the largest figure in the list of top 50 global banks.

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Impact on Bank Branches

The merger of banks leading to possibility of closing of some

branches on ground of overlapping has been mentioned by some

writers on the recent bank mergers. As evidence shows following the

2017 consolidation State Bank of India has closed more than 1000

branches, Bank of Baroda is in the process of closing 500 branches.

The new set of mergers will likely lead to another 2500-3000 braches

being closed. It is argued that the implementation of some social

sector schemes like the Pradhan Mantri Jan Dhan Yojana and

disbursement of all sorts of subsidies through branches of banks have

acquired renewed importance. Hence there is need for more bank

branches. But the bank merger and consolidation is likely to prove

counter-productive (Devidas Tulajapurkar)3.

NPAs and Bank Mergers

The Non-Performing Assets (NPAs) of the 10 banks merged into

four indicate that as many as 9 have NPAs ratio over 5%. Indian Bank

alone has net NPA ratio of below 5% at 3.75% as on 30 th March 2019.

United Bank of India (UBI) has the highest net NPA ratio of 8.67% as

on 31st March with Provision Coverage Ratio (PCR) to gross NPA which

indicates the extent of funds a bank has kept aside to cover losses. As

a result the merged entity in this case Punjab National Bank will have

a net NPA of 6.61% (against 6.55% pre-merger) and PCR of 59%

(against 61.72% pre-merger). The health of UBI looks up, that of PNB

goes down marginally. The lowest NPA in this merger is of Oriental

Bank of Commerce (net NPA ratio of 5.93%), so its NPA levels worsen

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with the merger. In general higher NPA numbers have come down,

capital adequacy has gone up. Hence it is argued that the amalgamated

entity is stronger and with average better lending capacity. Coupled

with the announced Rs. 55,250 crore bank capitalization the hope is

that these banks will be ready to support economic growth (R.K.

Pattnaik and Jagdish Rattanani)4. However it is argued that mergers

do not automatically reduce NPA volumes. The effect of mergers on

credit growth would largely result from the fact that the post-merger

NPA ratio of the merged entity would be some weighted average of the

NPA ratios of the merging entities. This would mean that the highest

NPA ratios would be eliminated making task of keeping banks out of

the PCA frame work easier to ensure (C.P. Chandrashekhar) 5

Conclusion

The mega banks merger leading to a few big banks is expected

to result in creating strong and globally competitive banks with

economies of scale and enable realization of wide ranging synergies.

These banks would have wider reach, stronger lending capacity and

better products and technology to serve customers. Bank merger was

expected to lower NPA, enhance capital adequacy and better lending

capacity, and these banks would support economic growth. However,

market economists and experts have contested the big bank theory

citing the past bank mergers that neither received credit growth nor

led to any meaningful cost reductions. The merger leading to a few big

banks may help but only when combined with many medium and

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small banks with jurisdictional limits and well-defined mandates of

lending to segments other than large conglomerates.

References

1. Mukesh Kumar Jain (2019). MD and CEO of Oriental Bank of

Commerce. Quoted by Soumik Dey in “Conditions Apply”. The

Week, 15th Sept. 2019.

2. Rajiv Kumar – Finance Secretary, Government of India.

3. Devidas Tulajapurkar (2019). Former Director, Bank of Maharashtra

– in “Merger to Serve Corporate Interest”. The Deccan Herald, 8 th

Sept. 2019, p. 6.

4. R.K. Pattanaik and Jagadish Rattanani (2019). “The Big Bank

Theory”. The Deccan Herald, 8th Sept. 2019, p. 6.

5. C.P. Chandrashekhar (2019). “Big Banks Not a Solution”. The

Frontline, 27th Sept. 2019, pp. 99-101.