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Shree Rastogi Legal News Reporter from Into Legal World
B.COM LLB 3rd Year
Bank consolidation occurs when two or more banks become one bank. According to American Banker, this happens through either a takeover by a bank or via a mutual merger between two or more banks. Bank consolidation can lead to expansion for the newly merged institution.
Bank consolidate for many reasons, including to mitigate competition, gain capital power both domestically and intentionally, to compete with larger banking institutions to expand the services that the newly merged bank can provide both internally and geographically by decreasing overall operating costs etc.
The Southeast Asian crisis of 1997 had encouraged consolidation and restructuring of banks in Asian countries. In the United States, there has been consolidation of banks since 1916. Restructuring of Indian banks through mergers and acquisitions had been recommended by various committees since 1972. Illustratively, the New Bank of India and Punjab National Bank, both PSB’s (Public Sector Banks), were merged in 1993. In 1998, the M Narasimham-led committee on banking sector reforms also recommended mergers of PSBs. Consequently, many banks were merged for instance, the State Bank of Saurashtra and State Bank of Indore with the State Bank of India (SBI) in 2008 and 2010, respectively.
RECENT CONSOLIDATION IN INDIA:-
As per the latest news the Government is planning to have more global-sized bank which will reduce the 21 public sector banks to just 12! Enthused by the success of FBI merger, government might reduce a 3 Tier Structure in the banking system. 3 Tier System should be introduced in Banking Structure:-
- The 1st Tier constitutes of at least 3-4 banks of the size of SBI.
- Tier 2nd will constitute of some region centric banks like Punjab and Sind Bank (BSE 2.55%) and Andhra Bank (BSE 0.88%) which continue as independent entities.
- At the same time, 3rd Tier will have some mid-size lenders.
Union Finance Minister Arun Jaitely had said that the government is “actively working” towards consolidation of public sector banks but declined to provide details, saying this was a price-sensitive information.
The Consolidation in banking sector can be done:-
According to Zee Business, United Bank and P&S Bank would merge into Bank of Baroda. Indian Overseas Bank, Syndicate Bank and UCO Bank will merge into Canara Bank. IDBI Bank, Central Bank and Dena Bank will all merge into Union Bank while Andhra Bank, Bank of Maharashtra and Vijay Bank will merge into Bank of India.
In February, the government had approved the merger of these five associate banks with SBI. Later in March, the cabinet approved the merger of BMB as well.
Reports say that in the last consolidation drive, five associated Banks and Bhartiya Mahila Bank (BMB) became part of SBI on 1 April ,2017 , catapulting the country’s’ largest lender to among the top 50 Banks in the world. 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), besides BMB, were merged with SBI, as PTI mentioned in its report.
Impact on growth of Indian Economy:-
- Large Banks would have a wider capital base and can offer loan of a larger amount.
- Public Sector Banks will improve their efficiency and service delivery.
- The volume of Inter Bank transactions will come down, resulting 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.
- Customers of small banks will get access to wider financial instruments like Mutual Funds and Insurance Products, available only with big banks.
- From the technology point of view, a larger bank may allow up gradation of more technology platform.
- India is the fastest growing major economy in the world. To sustain this growth, there is a need for mega banks that only will ensure investments into the larger scale infrastructure products.
- Consolidation will help in leveraging the synergies among the banks that have diverse portfolios, focus areas and overage areas.
- Improve the ability of banks to recover bad loans.
- At present, there is not a single Indian Bank in the top 50 global bank lists. The consolidation is expected to fill this gap, and, consequently, help in building the “Brand India” among International investors.
- Consolidation will increase competition.
- First of all, smaller banks will lose their local characteristic.
- Human Resource issues will be difficult to manage.
- It may also create distress within bank employees.
- There will be greater financial risks for the broader economy because of a few large inter-linked banks.
- Career growth (promotions) of senior management and other workers could attract problems.
- It will weaken the PSB’s and encourage private sector ranking.
- Consolidation should take place in positive environment. The present process of consolidation is not driven by the inherent strength of the banking system. It is resorted to escape from the problem of NPAs.
- There are apprehensions among the labour unions that the consolidation will lead to job losses.
- Rush to consolidation may increase risk taking.
The consolidation of bank has some advantages as well as some disadvantages. The size of each business entity after merger is expected to add strength to Indian Banking System in general and Public Sector Banks in particular and Indian Banks can gradually evolve/transform themselves into global banks. Consolidation of Bank will end the unhealthy and intense competition going on even among public sector banks as of now. While professional competition in the market place is welcome, unhealthy competition leads too many unethical practices and regulatory violations as noticed at present.