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Merger Matter: A Good Mahout To Steer This Mammoth!

Bank mergers are not a small task and requires an enormous understanding and movement in order to ensure that all cogs in the wheel fit seamlessly to ensure success.

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One of the most debated topic in the current banking circles is perhaps the Government’s announcement of the Big Bang merger in the PSU Bank (PSB) space and the infusion of Rs. 55,250 crore upfront capital into the PSBs. The amalgamation scheme includes the merger of Indian Bank with Allahabad Bank; Oriental Bank of Commerce (OBC) and United Bank of India with Punjab National Bank (PNB); Canara Bank with Syndicate Bank; Andhra Bank and Corporation Bank with Union Bank of India. The merger announcement itself is a bold step considering that Ten PSU banks are involved in the process involving 3,08,732 employees, Rs. 31,79,304 crore deposits, around 37,492 domestic branches and 45,448 ATMs.

The impact of these mergers goes deeper than just what is visible to the eye. These mergers impact deposit holders, shareholders borrowers, employees and public at large. The rationale for these mergers has been clearly spelt out i.e., creating larger banks so that they are more immune to mitigating solvency problems in downturns. Additionally, these mergers are aimed at eradicating the disparity that exists between large and small banks, along with cost savings from network overlaps and compliances, larger middle-management base to select candidates for the post of DGMs, GMs and CGM for credit appraisal, risk management, human resource management and information technology departments. In all, the mergers will facilitate efficiency in decision-making on high lending and restructuring with fewer banks in place.

However, mergers are not new for our banking system. Indian PSBs have a history and experience of mergers including the consolidation of State bank subsidiaries and Bharatiya Mahila Bank into SBI and most recent merger of Dena bank, Vijaya bank into Bank of Baroda. In the past too, New Bank of India and Nedungadi Bank Ltd got merged into PNB and Global Trust Bank got merged into OBC under different circumstances. While, any merger or consolidation does create apprehension amongst employees, shareholders and various other stakeholders connected with the organisation, the intense short-term pains can be removed with the prospects of long-term gains provided the merger process is seamlessly executed, with firm but fine balancing of stakeholder interests. Moreover, the interest of bank employees unions of various affiliations must be protected and their competencies be brought together for growth of the new entity.  


Transition Post Merger

Anchor Banks 

PSB rank by size

Total Business size (In Cr)

Deposits

(In Cr)

Domestic Branches

Employees

No. of ATMs

PNB

2nd largest 

17,94,526

10,43,659

11,437

1,00,649

13,897

Canara Bank

4th largest

15,20,295

8,58,930

10,342

89,885

13,360

Union Bank

5th largest

14,59,434

8,20,304

9,609

75,384

13,463

Indian Bank

7th largest

8,07,859

4,56,411

6,104

42,814

4,728



While it cannot be denied that SBI reported asset quality woes in the latest June quarter with it adding Rs. 16,212 crore to its already large bad loan book of over Rs.1.6 lakh crore. And, BoB also reported stress on profits and asset quality in the last quarter after the merger, What has to be understood is that benefits of consolidation are only achieved in the medium to long term as the stronger banks require significant time, efforts and resources to turnaround the weaker balance-sheets, implement the roadmap for aligning HR and infrastructure such as branches, ATMs, products, etc as well as the integration of Information Technology which is one of the biggest challenge. 

Integration is not an easy job and there are many things that have to be kept in view for a smooth transition. Case in point is the technology used by different banks. While using Oracle's core banking solutions (CBS) the versions used by Canara Bank and Syndicate Bank are different; Union Bank and Corporation Bank are working on Finacle 10 and Andhra Bank working on Finacle 7 bandwidth; even in the past BoB was operating on Finacle 10 and Dena Bank on Finacle 7. Integrating two networks on different IT platforms into a common one is tougher than setting up a new bank as each bank has developed a unique system by engaging with different vendors, hence, creating an entity that can seamlessly cover all aspects of the banking business will take a long time. Another important consideration is to assess shortage/excess land and building on a holistic basis so that they can be optimally used or disposed so that unproductive assets are encashed. Last but not the least the institutions with different cultures and processes to be brought on the same page are not a mean feat. 

So everything being considered, like technology, assets, liabilities and culture, what is the scope of success during mergers? The success of the mergers will depend on the ability to manage its aftermath with supporting changes. Using merger as a standalone initiative without enough reinforcements will weaken the purpose of merger resulting in inefficiency. The synergy of the bold bank reforms will have to be fully derived to infuse renewed optimism among PSBs which will depend on the leadership steering the process considering the mammoth challenges of handling resource integration, information technology platform integration, regulatory compliances, managing the demands of the Union, incentivizing the employees, customer retention, developing niche products, rebranding & repositioning and the succession planning to continue the efforts in the present economic slowdown, credit growth challenges and control on NPAs with the government providing the required impetus from time to time. 

To wrap it all up, bank mergers are not a small task and requires an enormous understanding and movement in order to ensure that all cogs in the wheel fit seamlessly to ensure success.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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PSU Bank merger

Sethurathnam Ravi

Sethurathnam Ravi (S Ravi) is the Founder and Managing Partner of Chartered Accountants’ firm Ravi Rajan & Co., an advisory and accountancy firm and former Chairman of Bombay Stock Exchange Limited (BSE) between November 2017 and February 2019

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