Merger of Public

Sector Banks
Ankur, Nagender, Bhaveek
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📖
Major bank mergers in
India
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Imperial Bank of India renamed to
State Bank of India

Merger of Bank of Bengal, Bank

of Bombay and Bank of Madras
resulting in the formation of 1955
Imperial Bank of India

1993
First ever PSB to PSB merger
1921 between Punjab National
Bank and New Bank of India
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📖
Why Mergers?
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In 1990s:
⊸ Narasimhan committee on
banking reforms recommended a
three-tier banking system; with 3
large banks with international
presence, 8-10 national banks
and a few regional and local
banks.
Basel 3 Norms stipulate
requirements of the following
aspects:
⊸ Minimum Capital Requirements
⊸ Counter cyclical measures
⊸ Liquidity and leverage measures
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Detailed Account
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State Bank of India
⊸ Acquired control of 7 regional
banks in 1960
⊸ Plans to merge SBI with
associate banks to create in
single large bank initiated in
2008
⊸ Merged with State Bank of
Saurashtra in 2008
⊸ Merged with State Bank of Indore
in 2009
⊸ Merged with 5 remaining banks
and Bhartiya Mahila Bank in
2016
Bank of Baroda, Vijaya Bank
and Dena Bank
⊸ Merger of the banks created the third
largest lender in India behind SBI and
HDFC
⊸ Market share – 7%; CAR – 12.5%;
Basel requirement of CAR – 10.5%
⊸ Prevented capital infusion from
government despite Dena running
high NPAs and being under PCA
Canara Bank and Syndicate
Bank
⊸ Merger of the banks created the fifth
largest public sector lender in India
⊸ Market share – 6.6%
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Union Bank of India, Andhra

Bank and Corporation Bank
⊸ Merger of the banks created the sixth
largest public sector lender in India
⊸ Market share – 6.3%
Punjab National Bank,
Oriental Bank of Commerce
and United Bank
⊸ Merger of the banks created the
second largest public sector lender
in India behind SBI
⊸ Market Share – 7.7% India Bank and Allahabad
Bank
⊸ Merger of the banks created the
seventh largest public sector lender in
India
⊸ Market share – 3.5%
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Current Scenario of
the mergers
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Serial No. Bank Name PSB rank by size

1 State Bank of India Largest

2 Punjab National Bank 2nd Largest

3 Bank of Baroda 3rd Largest

4 Canara Bank 4th Largest

5 Union Bank of India 5th Largest

6 Bank of India 6th Largest

7 Indian Bank 7th Largest

8 Central Bank of India 8th Largest

9 Indian Overseas Bank 9th Largest

10 UCO Bank 10th Largest

11 Bank of Maharashtra 11th Largest

12 Punjab and Sind Bank 12th Largest

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Gains visible from

PSB reforms
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Record Recovery of NPAs Gross NPAs

140,000 (In Crore Rs.) 9.2
9
120,000
8.8
100,000 8.6
80,000 8.4
8.2
60,000 8
40,000 7.8
7.6
20,000
7.4
- 7.2
FY17 FY18 FY19 Mar/2018 Jun/2018 Sep/2018 Dec/2018 Mar/2019

Provisional Coverage Ratio Enhanced Profitability

80 (In %)
14
70
60 4
6
50
40
12
30
20 Number of profitable PSBs
10 Number of loss making
PSBs
0
Mar-17 Mar-18 Mar-19
Q4 FY19 Q1 FY20
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Benefits of PSB
mergers
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Competitive: Capital and Governance: Technological

⊸ The consolidation of ⊸ Post-consolidation, boards Synergy:
PSBs helps in will be given the flexibility ⊸ All merged banks
strengthening its to introduce the chief in a particular
presence globally, general manager level as bucket share
nationally and per business needs. common Core
regionally. Banking Solutions
⊸ They will also recruit chief
risk officer at market- (CBS) platform
linked compensation to synergizing them
attract the best talent. technologically.

Efficiency: Monitoring: Self-Sufficiency:

⊸ It has the potential to ⊸ With the number of PSBs ⊸ Larger banks will
reduce operational coming down after the have a better
costs due to the process of merger – capital ability to raise
presence of shared allocation, performance resources from the
overlapping networks. milestones, and market rather than
And this enhanced monitoring would relying on repeated
operational efficiency become easier for the capital infusion by
will reduce the lending government and the the government.
costs of the banks. central bank.
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Challenges arising
from PSB mergers
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Weak Geographical Synergy:
⊸ During the merger, the geographical
synergy between the merged banks is
somewhat missing. In three of the
four merger cases, the merged banks
serve only one specific region of the
country.
Systematic Risk Increases:
⊸ Creation of few larger banks increases
the possibility of failure of one bank
to settle net transactions with other
banks triggering a chain reaction,
depriving other banks of funds and, in
turn, preventing them from closing
their positions. The consequence is
loss of confidence in the whole
banking system.
Integration impacts near-term
growth:
Post-consolidation, boards will be given the
flexibility to introduce the chief general
manager level as per business needs.
⊸ They will also recruit chief risk officer
at market-linked compensation to
attract the best talent.
Inability to revive NBFCs:
⊸ The merger is unlikely to revive flow of
credit to the liquidity pressed non-
banking financial companies (NBFCs)
given the already high share of NBFC
exposure in constituent banks, all four
merged entities will have more than 10%
of their loan exposure towards NBFCs.
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Slowdown in Economy:
⊸ The move is a good one but the timings
are not just apt. There is already a
slowdown in the economy, and private
consumption and investments are on a
declining trend. Hence, there is a need
to lift the economy and increase the
credit flow in the short-term, & this
decision will block that credit in the
short-term.
HR/People related issues:
⊸ HR related issues would be difficult
to manage. Career growth (of senior
management and other workers has
already been attracting problems,
leading to distress within the bank
employees.
Bad banks merged with Good Banks:
⊸ In the current merger decision, weak
banks are being merged with strong
banks. A complex merger with a weaker
would stall the bank’s recovery efforts as
the weaknesses of one bank get
transferred.
“Too big to fail”:
⊸ By merging of these banks into a few
large banks, any substantial disruption
in the particular institution’s operations
would be likely to have a serious effect
on a country’s financial markets
⊸ This leads to extended protection to
such large institutions
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Thanks!
Any questions?