Dr Jyoti Sharma
Senior Academic
consultant
MAHIAA ENERGY AND ENVIRONMENT TECHNOLOGY CONSULTANCY
SERVICES DELHI
Email
jyotiblogger27@gmail.com
Contact number
-9616509903
Introduction
The
Banking Companies(Acquisition and Transfer of Undertakings)Acts of 1970 and
1980 provide that the Central Government, in consultation with the Reserve Bank
of India (RBI), may make a scheme, inter alia, for the amalgamation of any
nationalised bank with any other nationalised bank or any other banking
institution Various committees, including Narasimhan Committee (1998)
constituted by RBI, Leeladhar Committee(2008) chaired by RBI Deputy Governor,
and Nayak Committe (2014) constituted by RBI, have recommended consolidation of
Public Sector Banks (PSBs) given underlying benefits/synergies. Taking note of
this and potential benefits of consolidation for banks as well as public at
large through enhanced access to banking services, Government, with a view to facilitate
consolidation among public sector banks to create strong and competitive banks,
serving as catalysts for growth, with improve risk profile of the bank,
approved an approval framework for proposals to amalgamate PSBs through an
Alternative Mechanism (AM). AM, after consulting RBI, in its meeting held on
17.9.2018, approved that Bank of Baroda, Vijaya Bank and Dena Bank may consider
amalgamation of the three banks. Banks have since considered amalgamation and
the Board of Dena Bank has recommended the same, while Boards of Bank of Baroda
and Vijaya Bank have given in-principle approval therefor. RBI has furnished
bank-wise total income of PSBs and private sector banks in the financial year
FY 2017-18 in this regard, which is given in Annexure.
Over
the last four and half years, Government has pursued a comprehensive approach
for addressing non-performing assets (NPA) issues. Key elements are as under:
Recognizing
NPAs transparently: Forbearance has been ended and stressed assets classified
as NPAs under the Asset Quality Review (AQR) in 2015 and subsequent recognition
by banks. Further, restructuring schemes that permitted such forbearance have
been discontinued in February 2018. As a result, as per RBI data, Standard
Restructured Assets (SRAs) of Scheduled Commercial Banks (SCBs) have declined
from the peak of 6.5% in March 2015 to0.49% in September 2018.
Resolving
and recovering value from stressed accounts through clean and effective laws
and processes: A fundamental change has been effected in the creditor-debtor
relationship through the Insolvency and Bankruptcy Code, 2016 (IBC) and
debarment of wilful defaulters and connected persons from the resolution
process. A sizeable proportion of the gross NPAs of the banking system are at
various stages of resolution in National Company Law Tribunal(NCLT). To make
other recovery mechanisms as well more effective, Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI)Act has been amended to provide for three months imprisonment in case
borrower does not provide asset details, and for lender getting possession of
mortgaged propertywithin30 days, and six new Debts Recovery Tribunal (DRTs)
have been established. As a result, NPAs of PSBs reduced by Rs. 2,61,359 crore
over the last four and a half financial years. Further, PSBs reported record
recovery of Rs. 60,713 crore in the first half of FY 2018-19 (H1 FY 2018-19),
which is more than double the recovery made in the first half of FY 2017-18,
and gross NPAs have begun declining with a reduction of Rs. 26,798 crore in H1
FY 2018-19. 30-day plus overdue account (Special Mention Accounts (SMA) 1 and
2) have also reduced steadily to around 39% over five quarters (from Rs 2.25
lakh crore in June 2017 to Rs. 0.87 lakh crore in September 2018 for PSBs),
indicating significant and sustained reduction in risk of fresh NPAs. Thus,
improvement in asset quality is evident with GNPAs having peaked recognition
nearly over, and the amount in SMA 1 and 2 reducing by 61% over five quarters.
Further, with substantial provisioning, the provisional coverage ratio(PCR)o
SCBs has risen steadily to 67.17% as of September 2018, from the pre-AQR level
of 49.3% in March 2015,cushioningbank balance-sheets to absorb the impact of
NPAs.
History
of Mergers in Indian Banking
Mergers of banks began in India in the
1960s
in order to bail out the weaker banks and protect the customer interests. After
that in post liberalization period the quest to create an Indian bank that
would be in the league of global giants had been continuing since 1990. Moving
on the path of creating one of the largest global banks, the government had
approved the merger of five associate banks with SBI in February 2017. Later in
March, the Cabinet approved merger of BMB also.
Merger
& Nationalization during the period from 1961-1969: The period is called
pre-nationalization period because in 1969 the government nationalized 14
private banks. As many as 46 mergers took place mostly of private sector banks
in order to revive the poorly performing banks which proved to be quite a
successful move for the underperforming banks
The period from 1969-1991: The
period was called post-nationalization period. It saw six private banks being
nationalized in 1980. In this period 13 mergers took place mostly between
public and private sector banks.
The post liberalization period, which
stretches from 1991-2015, saw major economic reforms initiated
by Government of India. Many new policies were framed. Greater FDI and foreign
investment was allowed which saw resurgence in Indian Banking. As many as 22
mergers took place - some to save weaker banks and some for the sake of synergic
business growth.
Bank Mergers (1993-2004): The
merger of Oriental Bank of Commerce with Global Trust bank in 2004 saved the
latter after its net worth had wiped off and also handed OBC a million
depositors and a decent market in South India. Mergers of Punjab National Bank
(PNB) with the then eroded New Bank of India (NBI) in 1993-94 and that of
Benaras State bank Ltd with Bank of Baroda in 2002 also proved to be life
saving for the weaker bank.
Bank Mergers & Consolidation
2008-2010: SBI first merged State Bank of Saurashtra with itself in
2008. Two years later in 2010, State Bank of Indore was merged with it. The
board of SBI earlier approved the merger plan under which SBBJ shareholders got
28 shares of SBI (Re.1 each) for every 10 shares (Rs10 each) held. Similarly,
SBM and SBT shareholders got 22 shares of SBI for every 10 shares.
Post
the merger, the SBI was in the process to rationalize its branch network by
relocating some of the branches to maximize reach. This, according to SBI
helped the bank optimize its operations and improve profitability. SBI had
approved separate schemes of acquisition for State Bank of Patiala and State
Bank of Hyderabad. There was no proposal for any share swap or cash outgo as
they were wholly-owned by the SBI.
Consolidation of Banks (2015-2017) – This
phase saw five associates of SBI and Bhartiya Mahila Bank getting merged in
SBI. The vision was to have strong banks rather than having large number of
banks. This resulted in SBI being one amongst the 50 largest banks in the
world.
Union
Cabinet decided to merge all the remaining five associate banks of State Bank
Group with State Bank of India in 2017. After the Parliament passed the merger
Bill, the subsidiary banks ceased to
exist and the State Bank of India (Subsidiary Banks) Act, 1959 and the State
Bank of Hyderabad Act, 1956 were repealed.
Five associates and the Bharatiya Mahila
Bank became the part of State Bank of India (SBI) beginning April 1, 2017.
This has placed State Bank of India among the top 50 banks in the world. The
five associate banks that were merged into State Bank of India were- State Bank
of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of
Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT).
The other two Associate Banks namely State Bank of Indore and State Bank of
Saurashtra had already been merged with State Bank of India. After the merger,
the total customer base of SBI increased to 37 crore with a branch network of
around 24,000 and around 60,000 ATMs across the country.
Merger of Banks 2018- The
government had merged Dena Bank and Vijaya Bank with Bank of Baroda, creating
the third-largest bank by loans in the country in 2018.
Mega Merger of Banks 2019- With
the mega merger announce on August 30, 2019, ten public sectors banks will be
reduced into four large banks. The four sets of banks are to be created out of
Canara Bank and Syndicate Bank merger; Indian Bank and Allahabad Bank merger;
Union Bank of India, Andhra Bank and Corporation Bank merger; and the bank to
be created after merger of Punjab National Bank, Oriental Bank of Commerce and
United Bank of India.
Six Banks Untouched: The
mega merger has left untouched six other banks out of which two are national
banks and the four have regional focus. The untouched banks are Bank of India,
Central Bank of India, Indian Overseas Bank, Uco Bank, Bank of Maharashtra and
Punjab & Sind Bank which will continue as separate entities as before.
Punjab National Bank to become 2nd
Largest Bank: Oriental Bank of Commerce and United Bank
merger into Punjab National Bank will create a bank with ₹17.95 lakh crore
business and 11,437 branches.
4th Largest Bank –
Merger of Canara Bank & Syndicate Bank: The merger of Syndicate Bank with
Canara Bank will create the fourth largest public sector bank with ₹15.20 lakh
crore business and a branch network of 10,324.
5th Largest Bank:
Merger of Andhra Bank and Corporation Bank with Union Bank of India will create
India's fifth largest public sector bank with ₹14.59 lakh crore business and
9,609 branches.
7th Largest Bank: The
merger of Allahabad Bank with Indian Bank will create the seventh largest
public sector bank with ₹8.08 lakh crore business having strong branch networks
in the south, north and east of the country
Advantages
of Bank Mergers
- ·
Larger Bank is capable of facing global
competition
- ·
The merger will reduce the cost of banking
operation
- ·
Merger will result in better NPA and Risk
management
- ·
Merger will help in improving the
professional standards
- ·
Decisions on High Lending requirements can be
taken promptly
- ·
For the bank, retaining and enhancing its
identity as a larger bank becomes easier.
- ·
After
the merger, benefits of merger are enormous and the biggest is generation of a
brand new customer base, empowering of business, increased hold in the market
share, opportunity of technology upgrade.
- ·
Provides better efficiency ratio for business
operations as well as banking operations which is beneficial for the economy
- ·
Minimization of overall risk is there due to
mergers and acquisitions which is always good from the business point of view
- ·
Leads to increase in profitability and helps
in raising the standard of living which is absolutely crucial for a growing
economy like India
- ·
Chances of survival of underperforming banks
increases hence customer trust remains intact which is vital for the Economy.
The weaker bank gets merged into stronger one and gets the benefit of large
scale operations
- ·
The objectives of financial inclusion and
broadening the geographical reach of banking can be achieved better with the
merger of large public sector banks and leveraging on their expertise.
- ·
With the large scale expertise available in
every sphere of banking operation, the scale of inefficiency which is more in
case of small banks, will be minimized
- ·
The merger will help the geographically
concentrated regionally present banks to expand their coverageLarger size of
the Bank will help the merged banks to offer more products and services and
help in integrated growth of the Banking sector
- ·
A larger bank can manage its short and long
term liquidity better. There will not be any need for overnight borrowings in
call money market and from RBI under Liquidity Adjustment Facility (LAF) and
Marginal Standing Facility (MSF)
- ·
In the global market, the Indian banks will
gain greater recognition and higher rating
- ·
With a larger capital base and higher
liquidity, the burden on the central government to recapitalize the public
sector banks again and again will come down substantially
- ·
Multiple posts of CMD, ED, GM and Zonal
Managers will be abolished, resulting in substantial financial savings
- ·
Bank staff will be under single umbrella in
regard to their service conditions and wages instead of facing disparities.
Problems
Arising due to Mergers & Acquisitions in Indian Banking:Most
of the problems arising due to mergers and acquisitions are more emotional and
social in nature than technical or managerial. The major problems which arise
are:-
- ·
Compliance needed in every decision which
might not be favorable as thinking perspectives and risk taking abilities of
different organizations are different. It leads to friction and rift which, if
not managed well may lead to the downfall of the organization as a whole.
- ·
Banks are merged only on papers. Their people
and culture are difficult to change. It is a recipe for disaster as it leads to
poor culture fit not ideal for the organization or the economy.
- ·
Risk of failure increases if the executives
are not committed enough in bringing the merger platforms together for the
merging and taking over bank. Such failure may prove brutal for the Economy.
- ·
Impact of customers on banking merger or
acquisition is often quite emotional. If customer perception is not managed
with frequent and careful communication it may lead to loss of business which
is never good for the Economy.
- ·
Managing Director of Federal Bank, V.A.
Joseph is of the view that Co-existence of the big, medium and regional banks
would be preferable in the present scenario. According to him most acquisitions
in India were borne out of compulsions and over 90 per cent of past
acquisitions had failed to achieve the objectives.
- ·
Many banks focus on regional banking
requirements. With the merger the very purpose of establishing the bank to
cater to regional needs is lost.
- ·
Large bank size may create more problems
also. Large global banks had collapsed during the global financial crisis while
smaller ones had survived the crisis due to their strengths and focus on micro
aspects.
- ·
With the merger, the weaknesses of the small
banks are also transferred to the bigger bank.
- So far small scale losses and recapitalization could revive the capital base of small banks. Now if the giant shaped bank books huge loss or incurs high NPAs as it had been incurring, it will be difficult for the entire banking system to sustain.
News
Article by Dr Jyoti Sharma for Mahiaa Energy and Environment Technology Consultancy
Services Delhi for December 2019 Month
