Back EPW -

Beyond the Merger Mania

Following the merger of Vijaya Bank and Dena Bank with the Bank of Baroda, the government has declared four more mergers:

1. Oriental Bank of Commerce and United Bank of India with Punjab National Bank (PNB)

2. Syndicate Bank with Canara Bank

3. Andhra Bank and Corporation Bank with Union Bank of India (UBI)

4. Indian Bank with Allahabad Bank

What will be the outcome of this merger?

1. The consolidation will bring down the number of PSBs in India by almost half.

2. It will increase the average size of the merged entities.

3. For example- a merged PNB is estimated to assume one and a half times its current size while Canara Bank and Union Bank of India will double their respective sizes.

Which are the concerns?

1. It is not clear how cost economies will be affected in the retainment and redeployment of staff.

2. Inefficiency of the PSBs is more related to their lending strategies and practices, particularly to the corporates than to their size.

3. Systematic risks could arise from having fewer larger banks.

4. Lending bias of these banks towards corporates might get reinforced. The consolidated entities might use their pricing power to push for more corporate credit in order to strengthen their financial position.

5. This will worsen the bad debt crisis in the country given the deteriorating financial health of the corporate sector.

6. Bigger size does not necessarily mean better performance.

7. Despite higher market share, the market value of assets of PSBs is lower than those of private banks.

How do these mergers ensure efficiency?

1. A lesser number of banks would enable speedier decision making across banks.

2. Pressures on the finance ministry to execute the appointments of senior banking personnel across a number of PSBs can be reduced.

3. Coordination failures in resolving problems like that of NPAs (Non-Performing Assets) can be minimized.

4. Merged banks can provide bigger amounts of funding and improve their bargaining position and pricing power with respect to corporates.

Where to focus?

1. Government must make these mergers a success by turning around the banking sector.

2. The success should not be restricted to mere initiation of reforms. Reforms should also focus on unaddressed major issues.