Merger of Banks- Good or Bad? (2024)

What is a Merger?

A merger is an agreement between two or more entities to pool their assets and liabilities and form a single entity. A merger of two companies entails a transfer of ownership, either through a stock exchange or through a cash payment between the two companies. As a result, both firms practically relinquish their shares and issue new stock, as well as share their debts, resources, technology, and other information as if they were a new company.

Bank mergers occur when a bank's non-performing assets increase to the point where it becomes a loss-making entity, which the government cannot always endure. A merger is unquestionably a major move, and it has an impact on a number of things.

Mergers in Indian Banking: A History

In India, bank mergers are not new; in fact, the first bank merger occurred in 1921 when three major banks, the Bank of Bengal, Bank of Bombay, and Bank of Madras, merged to form Imperial Bank of India, which eventually became known as State Bank of India. Then later in the 1960s bank mergers began as a way to bail out weaker banks. After that, since 1990, there has been a yearning to develop an Indian bank that can compete with global giants in the post-liberalization age. In February 2017, the government authorized the merger of five associate banks with SBI, putting it on track to become one of the world's largest banks.

MS. Nirmala Sitharaman, India's Finance Minister, announced the merger of ten public sector banks into four organizations in August 2019. The main rationale for this merger is to boost Indian banks' worldwide competitiveness. Hence, the total number of public sector banks has been reduced to 12.

Pros of Merging Banks

• The bank merger will open up more chances for the anchor bank to raise money from the market as well as internally.
• Because there would be fewer independent banks in the financial industry, competition will be less fierce. As a result, there will be more concentrated payment and settlement flows.
• Because the overall size of the bank grows, the gap between management and operational personnel grows, a bank merger will lower operational risks.
• More dividends will be sent to the government, which will be counted as non-tax revenue.
• Merging allows a financial organization to grow more quickly and gain significant market credibility. A merger gives a financial organization greater capital to work with while also expanding its geographic reach.

Cons of Merging Banks

• The activities of the stronger bank will be hampered following the bank merger due to the negative influence of the weaker banks.
• Employees are afraid of losing their employment, and their chances of advancement may be harmed as well.
• Management will encounter crucial issues such as branch rationalization, personnel integration, accounting synchronization, and so on.
• The current bad loan problems are unlikely to be solved via the bank merger process, which includes healthy institutions taking over weaker banks.
• Some branches may be closed if there are many branches in the same area after the merger.

Conclusion

Mergers of banks have their own set of benefits, such as increased capital adequacy, which allows the bank to invest in large infrastructure and other critical projects, expand geographical operations, provide better service to account holders, and improve performance. However, not all bank mergers are successful; bank mergers may result in employee unhappiness and job losses, and there may be incentives to obtain tax benefits or to engage in anti-competitive actions by eliminating competitors. Bank mergers are necessary for the economy to maintain bank liquidity, especially when a country is dealing with non-performing assets concerns. However, mergers must be carefully permitted, keeping employees in mind, and the merger should not result in anti-competitive behavior.

The political, economic, social, and technological architecture all have a role in whether or not mergers have the potential to have a good influence. In India, the acts made in relation to bank mergers are taken with the best of intentions. New customers, business empowerment, market reach, increased capital, and stability are some of the frequent factors in bank mergers. Overall, this concept has shown to be economically beneficial.