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Merger of Banks

Topics Covered:

Inclusive growth and issues arising from it.


Merger of Banks


What to study?

For Prelims: Which three banks are being merged?

For Mains: Merger- Significance, pros and cons, concerns.

Context: The government plans to merge 10 public sector banks into four. This would take the number of banks in the country from 27 in 2017 to 12.


New mergers include:

  1. Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation’s second-largest lender.
  2. Canara Bank and Syndicate Bank will merge.
  3. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank.
  4. Indian Bank will merge with Allahabad Bank.



Why merger is good? – Benefits for various stakeholders:

For Banks:

  1. Small banks can gear up to international standards with innovative products and services with the accepted level of efficiency.
  2. PSBs, which are geographically concentrated, can expand their coverage beyond their outreach.
  3. A better and optimum size of the organization would help PSBs offer more and more products and services and help in integrated growth of the sector.
  4. Consolidation also helps in improving the professional standards.
  5. This will also end the unhealthy and intense competition going on even among public sector banks as of now.
  6. In the global market, the Indian banks will gain greater recognition and higher rating.
  7. The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
  8. This will also reduce unnecessary interference by board members in day to day affairs of the banks.
  9. After mergers, bargaining strength of bank staff will become more and visible.
  10. Bank staff may look forward to better wages and service conditions in future.
  11. The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.


For economy:

  1. Reduction in the cost of doing business.
  2. Technical inefficiency reduces.
  3. The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
  4. After merger, Indian Banks can manage their liquidity – short term as well as long term – position comfortably.
  5. Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
  6. A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.
  7. Customers will have access to fewer banks offering them wider range of products at a lower cost.
  8. Mergers can diversify risk management.


For government:

  1. The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
  2. This will also help in meeting more stringent norms under BASEL III, especially capital adequacy ratio.
  3. From regulatory perspective, monitoring and control of less number of banks will be easier after mergers.


Concerns associated with merger:

  1. Problems to adjust top leadership in institutions and the unions.
  2. 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 centres.
  3. Mergers will result in immediate job losses on account of 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.
  4. Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
  5. 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.


Way ahead:

Merger is a good idea. However, this should be carried out with right banks for the right reasons. 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.


Committees in this regard:

  1. Narasimham committee (1991 and 1998) suggested merger of strong banks both in public sector and even with the developmental financial institutions and NBFCs.
  2. Khan committee in 1997 stressed the need for harmonization of roles of commercial banks and the financial institutions.
  3. Verma committee pointed out that consolidation will lead to pooling of strengths and lead to overall reduction in cost of operations.


Sources: the Hindu.