Bank mergers have benefited the sector: RBI
In a recent RBI report, the merger of banks in India since 1997 has been evaluated.
Following are highlighted:
- Mergers benefit both the acquirer and the acquired.
- The efficiency of acquirers has improved. The factors responsible for this are their penetration into diverse geographies, improvement in the share of interest income etc.
- The banks that have been acquired have also benefited due to increase in their shareholder value.
- Joint entities are more capable of facing financial risks.
- Most mergers of private sector banks were market driven, while mergers of public sector banks (PSBs) were done by the government.
Difference between Merger and Acquisition
- A merger occurs when two separate entities come together to form a new combined organization.
- In contrast, takeover refers to a situation in which a larger entity voluntarily acquires the assets and liabilities of a smaller entity.
History of Bank Mergers in India
- The process of bank mergers in India started in the 1960s to improve the condition of the banks and protect the interests of the customers.
- The year 1969 is considered an important year in the Indian banking system, because in the same year Indira Gandhi’s government nationalized 14 private banks of the country, completely changing the country’s banking system.
- After the year 1969, in the year 1980 also 6 private banks of the country were nationalised.
- Statistics of the Indian Banks’ Association show that since the year 1985, a total of 49 small and big banks have merged in the country.
Some of the important bank mergers:
- Punjab National Bank and New India Bank were merged in the year 1993-94, it is noteworthy that this was the first merger of two national banks in the country.
- Merger of Oriental Bank of Commerce and Global Trust Bank in the year 2004.
- State Bank of Saurashtra and SBI merged in the year 2008.
- Merger of SBI and its 5 associate banks in the year 2017.
Merger of Banks and Narasimham Committee
- In the year 1998 also a committee was constituted by the government under the chairmanship of M Narasimham. The main task of this committee was to review India’s banking reforms and give the above suggestions for it.
- The committee, while submitting its report in April 1998, recommended merger of large banks along with several other recommendations.
The dangers of mergers and acquisitions
- There is a problem in the implementation of the scheme due to the lack of commitment among the officials.
- This can have a negative impact on the thinking of customers.
- Competition is reduced and too-big-to-fail (TBTF) banks are created, which can have an impact on the entire banking system.
- TBTF means the failure of a bank etc can affect the economy of the entire country.
Benefits of M&A
- Economies of scale improve. This means that by increasing the output, the cost comes down.
- Market share and distribution capabilities increase.
- Lowers manpower cost and helps prevent brain drain.
- Financial resources increase.
- It removes business deficiencies. These shortcomings may be related to the product, geographical spread or technology.
Source – RBI
