The Central government proposed the amalgamation of State-owned Bank of Baroda, Dena Bank, and Vijaya Bank to create India’s third-largest bank as part of reforms in the public sector banking segment.
The merger of these three state-owned banks is a part of the government’s agenda of consolidation of public sector banks. The consolidation was proposed by the Alternative Mechanism.
The Union Cabinet in August 2017 approved amalgamation of Public Sector Banks through Alternative Mechanism (AM) with an aim to facilitate consolidation among the Nationalised Banks to create strong and competitive banks.
The merger benefits include getting economies of scale and reduction in the cost of doing business.
Technical inefficiency is one of the main factors responsible for the banking crisis. The scale of inefficiency is more in case of small banks. Hence, the merger would be good.
Mergers help small banks to gear up to international standards with innovative products and services with the accepted level of efficiency.
Mergers help many PSBs, which are geographically concentrated, to expand their coverage beyond their outreach.
A better and optimum size of the organization would help PSBs offer more and more products and services and help in the integrated growth of the sector.
The size of each business entity after the merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
This will also end the unhealthy and intense competition going on even among public sector banks as of now. In the global market, the Indian banks will gain greater recognition and higher rating.
The volume of inter-bank transactions will come down, resulting in a saving of considerable time in clearing and reconciliation of accounts.
The burden on the central government to recapitalize the public sector banks, again and again, will come down substantially. This will also help in meeting more stringent norms under Basel III, especially capital adequacy ratio.
A great number of posts of CMD, ED, GM, and Zonal Managers will be abolished, resulting in savings of crores of Rupee. This will also reduce unnecessary interference by board members in day to day affairs of the banks.
After mergers, the bargaining strength of bank staff will become more and visible. Bank staff may look forward to better wages and service conditions in the future. The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.
Customers will have access to fewer banks offering them a wider range of products at a lower cost. From a regulatory perspective, monitoring and control of less number of banks will be easier after mergers. This is at the macro level.
Concerns associated with the merger:
The immediate negative impact would be from pension liability provisions (due to different employee benefit structures) and harmonization of accounting policies for bad loans recognition.
There are many problems to adjust top leadership in institutions and the unions.
Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centers.
Mergers will result in immediate job losses on account of a large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other. This will worsen the unemployment situation further and may create law and order problems and social disturbances.
The weaknesses of the small banks may get transferred to the bigger bank also. New power centers will emerge in the changed environment. Mergers will result in a clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
Also, India right now needs more banking competition rather than more banking consolidation. In other words, it needs more banks rather than fewer banks. This does not mean that there should be a fetish about small-scale lending operations, but to know that large banks are not necessarily better banks.
The merger is a good idea. However, this should be carried out with the right banks for the right reasons. The merger is also tricky given the huge challenges banks face, including the bad loan problem that has plunged many public sector banks in an unprecedented crisis. Since mergers are also about people, a huge amount of planning would be required to make the consolidation process smoother. Piecemeal consolidation will not provide a lasting solution and what is required is an integrated approach from all stakeholders including the government.