Banks Mergers in India: Historical Perspective & Strategic Policy Issues.
| Author | Dhmeja, Nand L. |
Introduction
Banks in India have a long history and have undergone reorganization arising from the need to strengthen or to be competitive. Such reorganization has led to merger of banks primarily with the objectives to:
* bailout weaker banks,
* protect customer interests, and
* create an Indian bank that would be in league of a global giant i.e. to create larger banks to be competitive globally.
Merger of state-owned banks gained momentum after economic reforms and liberalization measures in early nineties. M. Narasimham Committee (1991) recommended merger of banks to form a three-tier structure with three large banks with international presence at the top, eight to 10 national banks at tier two, and a large number of regional and local banks at the bottom. Later, Verma Committee (1996) and Khan Committee (1997) recommended that banks and development financial institutions should go into gainful merger to have benefits of synergies and complementarities of the merging units. The merger should be between strong banks to have opportunities for pooling of strengths, to overall reduction of cost of operations with increased competitive ability, operational efficiency and better positioning and larger market share in business. The Narasimham Committee (1998) recommended that mergers be only between bigger banks, as that would lead to cost reduction and increase in business and profit. Similarly, the PJ. Nayak Committee (2014) had also suggested that state-run banks should either be merged or privatized. Mega merger exercise has been done in the last two years and the thirteen banks have been merged into five banks.
Merger can be broadly classified as a) mandatory or forced one, or b). Voluntary to cover the weak one. Forced mergers are presented in Table 1. Table 2 presents mergers which are voluntary as notified by the government. Mega mergers during the last two years (2018 -20) are presented in Table 3.
Merger of banks can be market driven or mandated by the government. Indian banking sector has been evolving continuously; the initial phase up to WW I was a difficult period as there was no entry norm and the banks were normally small and that too private.
During the Vedic period (Dhameja & Arora, 2020) three Presidency Banks, i.e. Bank of Bengal (set up in 1806), Bank of Bombay (set up in 1840) and Bank of Madras (set up in 1843) were amalgamated into a single bank in 1921, i.e. the Imperial Bank of India. The Imperial Bank was further reconstituted with the merger of a number of banks belonging to old princely states namely, Jaipur, Mysore, Patiala and Jodhpur. The Imperial Bank performed the functions of Central Bank prior to the establishment of Reserve Bank of India (RBI, 2008).
Though with the increase in economic activities, number of banks were set up, despite severe economic problems like inflation, low productivity of agriculture sector during WW I, number of commercial banks increased to 107 by 1930. However, during Great Depression a large number of banks failed.
After Independence, banks in India faced tough financial times, i.e. low capital base, they overreached themselves by opening more branches, and by advancing large loans against property or inadequate security. This led to failure of large number of banks and also loss in faith in the banking system. Most of the savings during this period were in the form of land and gold; the household savings which constituted 66 % of the total, mostly flowed to the postal department, considered as safer avenue due to government ownership. In such a situation, deposits mobilized by commercial banks were largely lent out to security-based borrowers in trade and industry (RBI, 2008).
In the wake of such a situation, amalgamation of banks was seen as a solution and the Banking Companies (Amendment) Act 1961 was enacted; until then amalgamation was possible by a banking company with any of the State Bank of India or its subsidiary. The policy of strengthening of banking sector through a policy of compulsory amalgamation and merger helped in consolidation of the banking sector, and as a result banks reduced from 474 to 210 during 1951 - 1961 and further to 20 in 1967. The branch offices during this period reduced from 1504 to 622 and further to 203 respectively (RBI, Sept. 2008). During 1954 to 1960, as many as 83 banks were amalgamated; while during 1960 to 1966, 217 banks were amalgamated. Further, merger of 46 banks during 19611969 was mostly of the private banks and that found to be a successful move to reform and revive the weaker banks.
Post-nationalization & Preliberalization Period (1969-1991)
Banks were nationalized in two rounds, 14 largest commercial banks were nationalized in 1969 in the first round, and six more banks were nationalized in 1980 with the objective to give more control of credit to the government; thus the government got control over about 91 percent of the banking system. There were 13 mergers between public sector and private sector banks during this period.
Mergers during 1991-2017
This was the period of economic reforms allowing foreign investment, and foreign banks were permitted. About 15 mergers took place during this period to restructure weaker banks (Table I). Mergers also took place with the purpose to expand and to achieve economies of scale (Table 2). For example, Global Trust merged into the Oriental Bank of Commerce (OBC) during 2004, that enabled OBC to get an entry into the southern market and got a million depositors; and the weaker Banaras State Bank merged with Bank of Baroda in 2002. However, merger of New Bank of India with PNB in 1993 and of United Western with IDBI in 2006 did not have good effect (Bandi Ram Prasad, Sept. 2019). During April 2017, associates of the SBI merged with SBI with the objective to expand, the merged banks included, Saurashtra State Bank, Bank of Indore, State Bank of Patna, State Bank of Hyderabad, Bhartiya Mahila Bank (BMB), State Banks Bikaner & Jaipur, Hyderabad, Mysore, Patiala, and Travancore.
Mergers 2018 Onwards
As a process of banking reform, government decided in 2018 to go in for mega mergers of nationalized commercial banks with the objective "to increase the global competitiveness and to reduce weaknesses of Indian banks". The banks so merged are presented in Table 3. The banks merger was done under the bank consolidation plan of the Union Government, so as to:
* Enhance capacity to increase credit
* Have banks with a strong national presence and international reach
* Reduce lending cost
* Have next generation technology for the banking sector
* Improve ability to raise market resources, to take up big projects and speed up economic development of the country and also to help India to be turned into a $ 5 trillion economy by 2024.
In order to scale up the banks, the government infused Rs. 55,250 crores in the capital of public sector banks before the merger exercise. It may be mentioned that the new recapitalization package infused to three banks namely PNB, Union Bank of India and BOB was approximately 63 percent of the total meant for nine banks (Times of India, Delhi, August 31, 2019).
Further, on analysis of mergers in 2019, one finds that:
* Profit as a criterion of merger does not hold, as losses of merged banks (Andhra and Corporation banks) of Rs. 7,971 crores were higher than that of Union's Rs. 5,247 crores.
* As against this, losses of Dena and Vijaya banks at Rs. 3,721 crores during 2016-18 were less than those of BOB at Rs. 7,828 crores.
* Similarly, losses of OBC and United at Rs. 8,701 crores were lesser than Rs. 16,256 crores of PNB...
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