Amalgamation of Public Sector Banks in India: Boon or Bane?

Introduction

Ten Public Sector Undertaking (PSU) banks amalgamated into four banks with effect from 1^st April 2020. In the biggest consolidation exercise in the banking space, the number of public sector banks in India has come down to 12 from 18. There were as many as 27 Public Sector banks in 2017. In the past, various other bank mergers have taken place. For instance, in 2017, the country’s largest public lender – the State Bank of India took over five of its associates and Bharatiya Mahila Bank. These were State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore and State Bank of Hyderabad effective April 2017. Last year, Vijaya Bank and Dena Bank were amalgamated with Bank of Baroda.

The exercise assumes significance as it is taking place at a time when the entire country is under the grip of COVID-19 outbreak. It has triggered 21-day lockdown to contain the spread of the deadly virus. Experts said merger at this point of time will not be very smooth and seamless. However, heads of the anchor banks are exuding confidence. The four anchor banks – PNB, Canara Bank, Union Bank and Indian Bank – are postponing some part of the implementation and processes due to the lockdown. After this consolidation, there are seven large public sector banks (PSBs), and five smaller ones.

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. 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.

Few Examples of Bank Mergers in the Past

Kotak Mahindra Bank and ING Vysya Bank merger and amalgamation of Centurion Bank of Punjab Ltd. with HDFC Bank took place in 2014 and 2008, respectively.

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.

Here are a few aspects of the PSU bank merger that came into force with effect from 1st April 2020:

• The amalgamation of Oriental Bank of Commerce (OBC) and United Bank of India into Punjab National Bank (PNB) makes it the second-largest public sector bank in the country, after State Bank of India (SBI). The new entity has a business of Rs 17.95 lakh crore and 11,437 branches, and combined strength of over 1 lakh employees.
• The amalgamation of Syndicate Bank into Canara Bank created the fourth-largest public sector bank with Rs 15.20 lakh crore business and a network of 10,391 branches, 12,829 ATMs and a combined strength of 91,685 employees.
• The amalgamation of Andhra Bank and Corporation Bank into Union Bank of India created India’s fifth-largest public sector bank with Rs 14.59 lakh crore business and 9,609 branches.
• The amalgamation of Allahabad Bank into Indian Bank created the seventh-largest public sector bank with Rs 8.08 lakh crore business. The combined entity would have 6,060 branches, a network of 2,870. Indian Bank was strong in south India and the merger of Allahabad Bank will give it wide access to north and east India, where the latter is stronger.
• Most of these banks were listed entities. So, as target banks will cease to exist, shareholders of these banks were allotted shares of the anchor bank. For every 1,000 shares of Syndicate Bank, 158 equity shares of Canara Bank were given. Similarly, an exchange ratio of 1,150 shares of PNB for every 1,000 shares of Oriental Bank of Commerce and 121 equity shares of PNB for 1,000 shares of United Bank was fixed. Those holding 1,000 shares of Allahabad Bank were allotted 115 shares of Indian Bank. For every 1,000 equity shares of Andhra Bank, 325 shares of Union Bank were allotted and for every 1,000 shares of Corporation Bank, 330 Union Bank shares were given.
• After the merger, there are 12 PSUs: Six merged banks and six independent public sector banks.
• Six merged banks – State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Indian Bank.
• Six independent banks – Indian Overseas Bank, Uco Bank, Bank of Maharashtra, Punjab and Sind Bank, Bank of India, Central Bank of India.
• There shall be no immediate branch closures in any of the banks. In future, if there are some closely located branches of the two/three banks, they may be merged/shifted with prior notice to customers.
• While the merger may have been effective from April 1, the integration of all the processes and technology can take months. Through this period, customers of the banks that are being merged into other banks could avail several services such as cash deposits and withdrawals and inter-bank fund transfers etc, either through their existing bank’s branches or through the new anchor bank’s branch soon.
• Furthermore, the existing bank account numbers, Indian Financial System Code (IFSC), Magnetic Ink Character Recognition (MICR) Code etc. will also remain the same, and customers of the banks will also be able to use the same existing cheque books and debit cards for now. Eventually, though new cheque books and pass books as well as debit cards will be issued with the details of the new bank.
• Internet banking portals and mobile applications of individual banks are also likely to operate just like earlier for now. So, the customers and deposit holders of the banks won’t have to worry much or go through any sort of fresh applications process in the near term.

Benefits of amalgamation for customers

• Customers will be associated with a much larger bank, having a widespread pan-India network.
• Customers will now have access to a larger number of branches.
• Customers can enjoy ATM services across increased network of ATMs without any additional charge
• Customers will have access to a wider array of products and services.

Benefits of amalgamation for the Organization

• Merger helps to reduce the cost of banking operation.
• Will give them a wider geographical reach and make balance sheets stronger.
• Multiple posts gets abolished, resulting in great financial savings
• Merger will result in better NPA and Risk management
• It helps the geographically concentrated regionally present banks to expand their coverage
• 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.
• Provides better efficiency ratio for the business operations which is beneficial for the economy
• 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
• After merger, Indian Banks can manage their liquidity – short term as well as long term position comfortably.  Thus, they will not be compelled to resort to overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
• Since number of public sector banks has come down.  This will end the unhealthy and intense competition going on even among public sector banks as of now.   Unhealthy competition leads too many unethical practices and regulatory violations as noticed at present.
• 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 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.
• For meeting more stringent norms under BASEL III, especially capital adequacy ratio, the larger banks need not struggle.
• Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
• A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of Crores of Rupee.
• Many controlling offices have to be closed, resulting in savings.
• In many banks, the GOI’s nominee and RBI’s representative on the bank boards will lose their jobs.  This will not only save considerably huge money, but reduce their unnecessary interference in day to day affairs of the banks.
• New People and New thinking will get infused in the new entity.  Better systems also may be introduced, to make the work life of the employees more comfortable and enjoyable.
• After mergers, bargaining strength of bank staff will become more and visible.  Bank staff may look forward to better wages and service conditions in future.
• The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.
• As the network of branches, after mergers, will be evenly distributed across the country, the threat of transfers to far off places will diminish for officers up to MMGS III.
• Banks can spend more money and other resources, for the training and development of their employees and officers.
• Employees will get wider exposure in the changed environment and new opportunities will open up for them.
• Trade Unions will have more numerical strength in the new organization.
• In the Trade Unions, dominance of one section, one linguistic group and one geographical region will come down.
• Customers will have access to fewer banks offering them wider range of products at a lower cost.
• Customer service will improve vastly due to advanced technology, improved systems and better ambience of bank branches.
• From regulatory perspective, monitoring and control of less number of banks will be easier after mergers.  This is at the macro level.
• Larger banks will have more stability and strength, making the job of the regulator easier.
• It helps to improve the professional standard.

Drawbacks of amalgamation for the Organization

• Mergers may 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 centre’s.  Though the closure or merger of a large number of branches will not happen all of a sudden, it is bound to happen over a period.
• Banks may be compelled to offer another round of VRS, especially to those above 50 years of age and to those having more than 25 years of experience in the same bank. Banks might lose thousands of talented and experienced personnel at a time, resulting in serious crisis at the middle and senior management levels.
• Mergers may result in 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 may worsen the unemployment situation further. The plight of people taking pre-mature retirement (through VRS route or otherwise) will turn more pitiable than being envisaged.
• The banks accounts linked to ECS and demat records are to be changed, in future.  This is a laborious, time taking and expensive exercise.
• Different banks have different goals, priorities and business strategies. Synchronization may be very difficult.
• The weaknesses of the small banks may get transferred to the bigger bank also. Acquiring Banks have to handle the burden of weaker bank.
• Many controlling offices have to be closed. This may result in data losses on one side and dilution of control on the other.
• It is difficult to manage the people and culture of different banks.
• Larger Banks are more vulnerable to Global Economic Crisis.
• Coping with the Employee disappointment could be another challenge.
• For the top positions of the banks, whose number may get reduced in the post-merger scenario, there may be tough and ugly competition.
• Since many of the GOI’s nominee and RBI’s representative on the bank boards will lose their jobs. This may loosen the control of RBI over larger banks.  There is also a likelihood of a large scale irregularity escaping the immediate notice of RBI, but surfacing much later.  This may spoil the reputation and credibility of individual banks and the regulator (RBI).
• Since the number of bank branches will be large, managing them may pose greater challenges.
• Mergers may result in clash of different organizational cultures. Conflicts may arise in the area of systems and processes too.
• People working in the larger bank (acquiring bank) may try to dominate the personnel working in the smaller bank (acquired bank).  Thus, the latter may be treated as second class citizens in the new, merged entity.
• Staff identified as surplus in many pockets (urban and metros) may be transferred to far off places.  This might create turmoil and widespread protests.
• Promotional avenues for staff after merger may come down.   In promotions, the staff of the acquiring bank might have a lion’s share, leading to strong discontentment, rivalry and open disputes.
• Many Trade Union leaders may lose their prominence and even positions, in the new set up.
• Initially, the customers of both the banks may find it difficult to deal with new set of people, their attitude and style of functioning.
• Several problems may crop up in the area of reconciliation of accounts, updating of records etc. Especially in Suit Filed Accounts, SARFAESI/DRT Cases, Written off Accounts, this problem may be acutely felt.  In the meantime, cases of fraud and   misappropriation/embezzlement may also be reported.
• When a big bank books huge loss or crumbles, there may be a big jolt in the entire banking industry. Its repercussions will be felt everywhere.
• After merger, the share price of the merged entity might fall immediately. The rate of dividend also might diminish during the first two or three years following mergers.
• For general Public, There may be some confusion initially.  It may be difficult to remember the name of the banks which have been grouped together and amalgamated.
• While the merger may have been effective from April 1, the integration of all the processes and technology may take several months.
• There may surely be overlapping roles, which may be reassigned; some of the employees may also be transferred to different departments or branches as the transition process takes shape. There may be some impact on new hiring too.
• 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.
• Many banks focus on regional banking requirements. With the merger the very purpose of establishing the bank to cater to regional needs is lost.

Disadvantages of amalgamation of public sector banks on their employees

• The merger of public sector banks will create an excess workforce, which may consecutively lead to early VRS (maybe forcefully).
• It may also stop further hiring or recruiting people curtailing employment opportunities. And chances of Career Progression in form of Promotions may hamper.

• It may result in the closure of many bank branches, administrative offices, and ATMs. This may result in relocation of Staffs.
• It could ignite clashes between MDs (Managing Directors), EDs (Executive Directors), and GMs (General Managers). Senior executives in sync are vital while incorporating the works, plans and services.
• Because of different banking nature, banks don’t share the same culture, systems, and procedures. This may also lead to clashes. Perhaps large banks may not treat the smaller banks employee equally. This could affect employees’ promotion. Furthermore, there may be possible grounds that out of hatred they could transfer the employees to far-flung places. This may create an unhealthy working environment in the workplace.
• Public Sector Bank Mergers may also bring down the number of posts at the top-level executives (MDs, EDs, and GMs).
• The merger of a weak bank to a stronger one will also affect the efficacy of the stronger bank. The losses incurred by the weak banks may wipe-out the profits earned by these strong banks.

Here is how Customer’s are likely to be impacted by this move:

Almost every other individual who has a savings account or fixed deposit with a public sector bank is likely to be impacted.

• Get ready to change the cheque books as the various banks get merged. While the existing cheque books may remain valid for some time, but ultimately they may be replaced with the cheque books of the merged entity.
• Customer’s would have given their bank account numbers and IFSC codes for various financial transactions like auto credit of dividends via ECS, auto-credit of salary, auto debit of systematic investment plans (SIPs) in mutual funds and various bills/charges etc. After these accounts are seamlessly merged into the financial system of the new merged bank, Customer may be required to change the details of their bank given for these purposes.
• Credit/debit cards issued by the merging banks may have to be exchanged for those of the merged entity although the former are likely to remain valid for the interim period to ensure no disruption in services. But after these accounts are seamlessly merged into the financial system of the new merged bank, Customer may be required to change their Credit/debit cards as well.
• Paperwork and keeping financial trail of fixed deposits made will increase a bit as these will be transferred into the merged bank.
• It is, however, not clear what will happen to the interest rates of those who have loans running with these banks as the MCLR rates are different for different banks.

Conclusion

Mergers or amalgamations are important for the consolidation and expansion purposes, They are also crucial for Economy as they are most of the times successful in saving weak banks which fail in meeting expectations. As per studies conducted, most of the mergers done in the past have proved to be an overall success for the weaker banks although there are no concrete parameters to verify this observation. Hence going by the track record merger and acquisition in Indian banking have been fruitful for the Indian Economy. But Merger also creates variety of problems which can cause great damage if the process of merger is not executed properly.

So, the point is that Amalgamation should be carried out with the utmost care and executed in a manner which leads to an environment of Trust and agreement between all the organizations. If these things are taken properly, and if people, work culture and vision are blended together nicely, merger may definitely have synergic effects it can create a win-win situation. Otherwise consequences can be damaging.

Amalgamation had already taken place. Soon the Time will tell us, whether the Amalgamation of Public Sector Banks in India proves to be Boon or Bane?