What is Banks
A bank is a financial institution where customers can save or borrow money. Now, in India, there are two types of banks-
Public Sector Banks
Public Sector Banks are a major type of bank in India, where a majority stake is held by the government. Say for example, SBI is public sector bank, where the government holding 58.60% stake.
Private Sector Banks
In these banks, most of the equity is owned by private bodies, corporations, institutions or individuals rather than government. These banks are managed and controlled by private promoters. Post-liberalisation in the 1990s, banks such as ICICI, HDFC which got the license are the new age Private sector banks.
Of the total banking industry in India, Public sector banks constitute 72.9% share while the rest is covered by private players. In terms of the number of banks, there are 27 public sector banks whereas 22 private sector banks.
The Bank merger
The public sector banks were hit hardly by Non-performing Assets (NPA). This is the reason Indian government is thinking about renovating public sector banks. Government of India is planning to merge government owned banks to create a few strong banks that can compete in a global race. The finance minister in a press conference held in August, 2019 said that the 27 public sector banks existing in 2017 will be reduced to 12 after the mergers announced are implemented. With this merger, Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation's second-largest lender.
POSITIVE EFFECTS OF THE BANK MERGER
Good global competition
Larger Bank is capable of facing global competition. The Government targets 5 trillion-dollar economy through these bank reforms and consolidation. The Government would infuse Rs 55,250 Crore of capital in these 10 big banks for their credit growth and regulatory compliance to boost the economy. In the global market, the Indian banks will gain greater recognition and higher rating and also can have a possibility to emerge as a global bank.
Better management and customer satisfaction
The merger will reduce the cost of banking operation. It will also result in better Non-performing Assets and Risk management. The chances of survival of underperforming banks increases hence customer trust remains intact which is vital for the Economy. The weaker bank gets merged into stronger one and gets the benefit of large-scale operations, so does the customer
A larger bank can manage its short- and long-term liquidity better. For the bank, retaining and enhancing its identity as a larger bank becomes easier. After the merger, benefits of merger are enormous and the biggest is generation of a brand-new customer base, empowering of business, increased hold in the market share, opportunity of technology upgrade. Thus, it proves to be beneficial to the overall 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. Now, there are more than required no. of banks in many areas. For example, there are State bank of India, Bank of India, Syndicate bank in a small town. After merger only one branch can replace all these branches. This will result in reduction of operational costs and improved efficiency.
NEGATIVE EFFECTS OF THE BANK MERGER
Unlike SBI merger, Public sector banks merger will create more problems because of merging of heterogeneous banks. These banks have different policies and regulations. Merging different types of banks will lead to confusion and can further aggravate the present problems. With the merger, the weaknesses of the small banks are also transferred to the bigger bank.
Effect on customers
Impact on customers of 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.
Danger during crisis
Large bank size may create more problems also. Large global banks had collapsed during the global financial crisis while smaller ones had survived the crisis due to their strengths and focus on micro aspects. 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.
Merger may result in years of administrative problems. Different Banks have different culture, systems, processes and procedures and the merger will lead to clash of organizational cultures. Employees of larger bank does not give equal treatment to employees of smaller bank in the new and merged bank. This may happen in transfers, postings and promotions or in day to day working. This may lead to discontent among staff and unhealthy working environment which will affect the efficiency of workers.
After merger of public sector banks, there will be excess workforce, which will lead to VRS and further hiring will be stopped or restricted, which will affect the employment. It will also result into closure of many branches, administrative offices, ATMs, processing centers etc. The excess workforce at some centers will be transferred to far off places.
Importance of bank merger
Mergers are important for the consolidation and expansion purposes that is why in today’s scenario many private sector banks are genuinely interested in mergers and acquisition. They are also crucial for Economy, as they are most of the times successful in saving weak banks which fail in meeting expectations.
The problem of Non-performing Assets
NPAs are piled up not because of small banks, but because of inefficient policies to do with NPAs. Hence, a way should be found to solve the problem of NPAs.
The employee satisfaction will be a major issue for the work environment in the bank. Hence there should be a proper code of conduct for all the employees to follow.
To compete with the world, India needs more global level banks. But, how the government deals with the problems associated with merging will decide the success of merging. If merging is needed it must be executed in a manner which leads to an environment of trust and agreement among the people of both the organizations. If people, work culture and vision are blended together nicely, merging will definitely have synergic effects and create a win-win situation.
If you want to have a brief idea about how to present these points in front of a group, do watch the video-