Merger of Indian PSU Banks- A need of Consolidation

The banking system in India has undoubtedly earned numerous outstanding

achievements, in a comparatively short time, for the Worlds largest and the
most diverse democracy. There have been several reforms in the Indian banking
sector, as well as quite a few successful mergers and acquisitions, which have
helped it, grow manifold.

The year 1968 witnessed an ordinance issued by the Government of India and
14 large commercial banks in the country were nationalized. These fourteen
banks, back then, contained a whooping eighty five per cent of the total bank
deposits in our country. 1980, was witness to yet another round of
nationalization and six more commercial banks came under the government
control. With this huge leap, an enormous ninety one per cent of the banking
sector came under direct control of the Indian Government. With this, the
number of nationalized banks in India rose to twenty. Sometime later, in the
year 1993, the government took yet another stride towards economic prosperity
and made a turn towards merger of banks. The New Bank of India was merged
with the Punjab National Bank (PNB). This was the first merger between
nationalized banks, ever witnessed in Indian history and consequently, the
number of nationalized banks in India was reduced from twenty to nineteen and
that remains the same till date.

Report of the Narsimhan Committee

The Narsimhan Committee, to file a report regarding the reforms in the Indian
Banking Sector, was set up in the month of December, 1997. It submitted a
report with the following suggestions, on April 23, 1998.

It stressed on the use of merger of banks, to enhance size as well as

operational strength for each of the banks.
It made a recommendation for the merger of the large banks in India,
with an attempt to make them stronger, so they stand mighty fine in
international trade.
It recommended speeding up of computerization in the Public Sector
Banks.
It established that the legal framework must be strengthened, in order
to aim for credit recovery.
 It suggested that there be 2 to 3 banks in India that be oriented
internationally, 8-10 national banks and a vast network of local banks
to help the system reach the remote corners of India.
It lay stressed that bank mergers must take place among entities of
similar size. This implies that weak banks merge with the weak ones
while large banks with the larger and competitive ones.
It also suggested the confinement of local banking network to the
boundaries of states or a few districts.
Evaluation of the manner of staffing, training process and the
remuneration policy of PSU Banks.
It stated that the enhancement in banking risk can be directed and
equated to increase in capital adequacy.
Suggested the review of the RBI Act, the Nationalization Act,
Banking Regulation Act, as well as the SBI Act.
It stressed on professionalization of banking boards.

Raghuram Rajan Committee

Raghuram Rajan contributed a guest column, in the month of April 2009,

for The Economist, and it was in this column that, he recommended a regulatory
system, which may reduce boom-bust financial cycles. His suggestions for the
banking sector in India were

India is a vast nation in itself, hence, given this fact, it is practically

impossible to control the flow of capital and therefore, the economy
will always be uncertain and volatile.
In order to develop into large banks, it is required that an entry point
be offered in the system, which can be used by the bodies.
Technological advances may help in evolving small banks and reduce
the costs of operation.
Encouragement must be provided to the professional markets, in full
swing.
Underperforming PSUs were suggested to be sold.
Markets to be banned, in order to reduce or eliminate creation of
slightest uncertainty among the investors.
The regulation of trade to be brought under the control of SEBI
(Securities and Exchange Board of India).
He also suggested an open-minded outlook towards merger of banks
and takeovers.
 Encouragement should be given to participation in the domestic
market by the foreign firms.
Must aim to create such an environment for the investors that has high
scope for innovation and is accepting towards the same.

Pros and Cons of PSU Bank Merger

1. Pros

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.
Indian Banks can slowly and gradually evolve/transform themselves
into global banks.
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).
The number of public sector banks will come down, perhaps to 6 or 7,
after the merger of banks. This 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.
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.
The overall profitability of mergers is expected to improve.
For meeting more stringent norms under BASEL III, especially
capital adequacy ratio, the larger banks need not struggle.
A great number of posts will be abolished, resulting in savings of
crores of Rupee.
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
 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.
After mergers, all public sector banks will be extending all types of
services.
Another major advantage of a merger would be compressed
transaction costs and reducing the risks associated with financing of
small businesses, which may be high for small banks. Large, banks
can mitigate costs better and penetrate through lending into these
sectors, thus financial inclusion in true wisdom can be achieved.
In addition, this will augment geographical diversification and
penetration into new markets. In todays digital age, such a
consolidation will also shrink the common cost that goes into
technology; such a cost can be applied homogeneously in the merged
entities. However, while monitoring, caution should be observed on
skewing consolidated portfolio towards higher risk-return investment,
which may be damaging to the economy.

2. Cons

It will be difficult to precisely assess the impact of mergers in

quantitative terms, at this juncture. We must know the terms of
merger, before embarking on such exercise.
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. 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.
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. The plight of people taking pre-
mature retirement (through VRS route or otherwise) will turn more
pitiable than being envisaged.
This presumption may go wrong also.
 The weaknesses of the small banks may get transferred to the bigger
bank also. The amalgamation of Global Trust Bank with Oriental
Bank of Commerce in 2004 is a case in point.
Many controlling offices have to be closed. This may result in data
losses on one side and dilution of control on the other.
Mergers will result in clash of different organizational cultures.
Conflicts will arise in the area of systems and processes too.
People working in the larger bank (acquiring bank) will try to
dominate the personnel working in the smaller bank (acquired bank).
Thus, the latter will be treated as second class citizens in the new,
merged entity.
Staff identified as surplus in many pockets (urban and metros) will be
transferred to far off places. This will create turmoil and widespread
protests. It will take minimum 3 years for the disturbances to subside
and for the peace to return in the new organizational space.
Promotional avenues for staff after merger will come down. In
promotions, the staff of the acquiring bank will have a lions share,
leading to strong discontentment, rivalry and open disputes.
Initially, the customers of both the banks will find it difficult to deal
with new set of people, their attitude and style of functioning.
There will be some confusion initially. It will be difficult to
remember the name of the banks which have been grouped together
and amalgamated.

History of Merger

A merger, clearly, is not going to be a cakewalk for any governmental financial

institution. However, once it is formalised, it would prove be a win-win situation for
both the employees and the organisation.