Consolidation in Indian Banking Sector

Bank of Calcutta is the first commercial bank of India. It was set up by the British at Kolkata, the then Calcutta, in 1768. The British also set up two other banks in the name of Bank of Madras and Bank of Bombay. These banks were recognized and amalgamated to form Imperial Bank of India in 1921. This was the first instance of consolidation of banks in India. Indian banking sector has seen massive reforms and revolution over the last century, to see a robust financial system in the country. Changes in the economic policies in early 1990s embarked on liberalization, privatization and globalization (LPG). This helped in diversification of the economy and strengthened the infrastructure of operational banking. This enabled the establishment of private banks like HDFC, UTI, ICICI and IDBI banks. Since then, the banking sector has seen massive growth both in terms of customer base and banking services.

Mergers and acquisitions in India were initiated as per recommendations of the Narasimham committee II. Recommendations of the committee were based on the idea that one single entity is better than many bits and parts. The merger must enable better economical and commercial growth of institutions and in turn should serve the nation more efficiently. Merging of financial institutions involves a series of legal and administrative measures to add bank assets of the bidder and liabilities to the balance sheet of target banks.

Over the years, the Indian Government has an intention to consolidate the public sector banks, to enable better functioning, monitoring and strengthening. In 2015, the Union Cabinet approved the merger of five associate banks of the State Bank of India.

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Consolidation in Indian Banking Sector

Pros of Mergers

Merging and consolidating banks would help in strengthening the bargaining power of banks, reduce operational expenditure, improves supervision, enhances capital efficiency, helps recover bad debts and allows knowledge sharing. It helps leverage the benefit of economies of scale. With high capital requirements, this is very important in fueling the large scale infrastructure projects across the country. 

Issues with Merger

Consolidation of banks might create considerable risks in the current scenario of high stressed assets across various banks. These potential risks can hamper potential benefits in the long run. 

Moreover, there are issues with hierarchy of the organization and employee benefit schemes in the merged or consolidated structure.

For example, it is necessary to consider the provision of adequate system in order to define seniority levels of employees of merging banks in the consolidated system.

SEE ALSO: Phases of Indian Banking

Key for Successful Consolidation

One of the very important factors to achieve best results of consolidation is the rationalization of cost. This facilitates reduction in the number of branches of different banks in the same locality. This is specifically important in the metro cities due to high density of bank branches.  

• Geographical Location: The main idea here is the promotion of geographical synergies. This enables banks enhance geographical outreach and diversification of their customers. However, there is a possibility of lack of awareness on the bank located in a different area.
• Technology: Another idea is to make sure that there is technological synergy between the merged or consolidated banks. This is very important in the modern World as banking system is rapidly adapting newer technologies. Lack of technical platforms might hamper smooth merger.
• Employees: Employees are the face of any organization. An organization would go nowhere without employees. A few employees might be apprehensive on a possible loss of organizational identity due to a merger. There must be a proper system in identifying new roles for employees in the consolidated structure. Expertise and relevant experience of employees must be clearly identified and must be in sync with the vision of the merged or consolidated structure. 

SEE ALSO: History of Banking in India

Previous Mergers

1) HDFC Bank and Centurion Bank of Punjab (CBoP): This consolidation happened back in 2008. The value of the consolidation was about USD 2.5 Billion. Shareholders of Centurion Bank of Punjab CBoP, received one share of HDFC for every 29 shares of CBoP. Few factors to determine financial performance of banks post merger were analyzed and results show positive effects outweighing negatives and hence an increase in performance.

2) ICICI Bank and Bank of Rajasthan: This consolidation happened recently, in 2010. Shareholders of Bank of Rajasthan received 25 shares of ICICI for every 118 shares of Bank of Rajasthan. The consolidation of banks offered a strong geographical outreach to both banks with a stronger customer base. Analysis of various financial factors shows that there is a considerable growth seen post merger for both banks.

Latest Merger

The state run Bank of Baroda has become India’s second largest commercial bank after Vijaya Bank and Dena Bank amalgamated with Bank of Baroda. The merger will be effective from 1^st April 2019. This is the first ever 3 way merger of banks in India. The merger has a combined reach of 9,490 branches, 13,000 ATMs and 85,678 employees serving a customer base of 120 million.

The table below gives a quick fact of the merger:

Conclusion

The merger of banks might be a positive result from many angles. The consolidation might enhance the capital which is important in supporting the infrastructural development of the nation. This helps banks feature on the global front and strengthens banking structure in India. However, it is necessary to identify key issues and come up with a suitable plan. There is a need to develop an overall plan for consolidation when accounting for compatible geographical location, employee welfare and technology.

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