In order to increase the efficiency and productivity of banks, Merger of banks should be done. Many public sector banks have been merged together from last year. subsequently, Major nationalized banks have been merged in India.
What are you going to explore
- What is a merger of the bank?
- Why it is done?
- How it is done?
- Positive and Negative impacts of the merger
- Conclusion of blog
What is a merger of the Bank?
When one or more banks join together to increase the performance of an organization it is called the merger of a bank. It has been more than 50 years completed by the nationalization of banks.
Public sector Banks (PSBS) have been merged since 1921 when three presidency banks of India I.e., Bank of Bombay, Bank of Bengal, and Bank of Madras merged to form Imperial Bank of India (Currently State bank of India).
Meanwhile in 2017 5 associate banks of state bank of India:- State bank of Patiala, state bank of Bikaner and Jaipur, State bank of Mahila, state bank of Mysore, and state bank of Travancore merged together into SBI
However to increase the profitability of an organization, banks have been merged together to serve better services and resolve drawbacks.
Why it is done?
Firstly an amalgamation of banks or any financial body has done to better the working of that organization. In order to improve the financial health of the bank; a “merger” can be an option. These mergers help to scale up the economy of the country.
Secondly mergers will increase proficiency and profitability and reduce the cost of operation in banks. Mergers will increase the overall productivity and availability of banks in the market.
Similarly it will increase the branch network which increases the convenience of banking services for customers.
How it is done?
To clarify amalgamation or merger of banks is not an easy process as it looks. But a merger is done by the approval of the union cabinet. Meanwhile in the latest merger of 10 Public sector banks.
Finance minister Nirmala Sitharaman announces that the government not only joining them into four big banks of the country but also going to infuse approximately INR 55,250 crore rupees in these PSU banks. Source
Some of the recent PSU bank mergers done in India:
Meanwhile, the Oriental bank of commerce (OBC) and the united bank of India are merged with Punjab National Bank PNB.
Subsequently Syndicate bank is merged with Canara Bank.
Similarly Andhra bank and corporation bank are merged with Union Bank of India.
After that Allahabad bank is merged with the Indian banks.
Now there are six independent nationalized banks after the merger in the year 2020.
These banks are merged on the basis of their technical operating portals.
- Codes and ID
Firstly new IFCS and MICR codes have formed for the new banks. New account numbers and customer IDs are provided to customers in the case where an individual has an account in both (main bank and amalgamating bank) than two account numbers of the same name with a single customer ID is allotted to Customer.
- Resubmission of Documents
Secondly customers have to resubmit their bank details for further financial transactions like auto credits and auto-debits. The loans will be linked to the new bank account merger of the bank will impact the rate of loans.
- Updation of bank details
Thirdly customers of the banks have to update the new bank details in the third party entities for the proper functioning of electronic clearing services of NBFCs, insurance companies to get maturity encashment, mutual funds, pension schemes to get redemption of matured amount, Income tax department for tax refunds, etc
- Technological factors
Fourthly banks with the same technological platforms are merged together to avoid technical clashings like in the case of Oriental bank of commerce and the united bank of India.
However, Debit cards and credit cards allotted to the customer remains the same. Cards will be replaced or new cards will be re-allotted to customers after the expiry of old ones
- Financial instruments
Therefore in the case of cheques and other financial instruments, new checkbooks will be issued to customers with the new account numbers and new IFSC code mentioned on the instrument.
- Share allotments
At last shares of the main bank will be allotted in pre-decided ratios of shareholders like in the bank of India.
Positive and Negative impacts of the merger
- On the one hand to reduce the operation cost. Small firms have higher average costs. Increasing output leads to lower average cost which will result in higher profits.
- However the efficiency of operations will improve. Banks will perform more result-oriented operations.
- On one hand Access and affordability of financial products and services along with spread in geographic research.
- The difference in wages, allowances, and perquisites will reduce and get a uniform platform for every designation.
- The burden on the government of the recapitalization of public sector banks will be reduced. Capitalization in banks on a regular basis will be reduced.
- The financial health of the organization improves. Financial savings will improve by reducing unnecessary posts and designations. Only the necessary staff should be appointed or replaced by efficient ones.
- It is not easy for banks to finance big projects by the merger of banks it will increase the capacity to provide loans of banks. Hence they will finance massive projects. This will also solve the financial crisis of NBFCs by shifting the burden.
- Because of amalgamation financial capacities of banks will increase. Hence Problem of Non-Performing Assets and risk management departments are benefited.
- However there is a lack of availability of expertise in small Banks. The merger will help to increase the availability of expertise in the market.
- Because of the merger, there are limited banks that perform in the market due to which building next-generation banks, Increasing in standard and technology is easier for the merged entity.
- On the other hand merger leads to overstaffing of employees. The number of employees for a particular work will be more.
- But the number of members on the board committee will reduce. This will impact negatively on decision making and policymaking.
- On the other hand when the size of an organization increases the risk of falling it also increases because new and high-risk factors will start impacting the organization.
- Mergers can week financial stability and provoke a global economic crisis. Due to limited financial institutions in the economy. The impact cannot shift.
- No other options will be available to bear the financial burden.
- This will increase with the mergers because of the limited availability. The final burden will fall on the customer.
- Public sector banks issue fewer job opportunities in the market.
- Because of the merger, there are limited Public sector banks customer has no other options to opt for their requirements in PSUs rather than going for the private sector bank.
Conclusion of blog
In this blog we have discussed what is a merger of banks, some recent mergers of public sector undertaking. we have discussed how banks are merged together and work as a single entity.
We also talk about the changes that will be done at the time of the merger. At last, we have discussed the positive as well as the negative impacts of the merger.
Answer: Narasimham Committee recommended the merger of banks in India
Answer: Merger can be an option to improve the financial
the health of banks and the economy.
Answer: To improve the financial health of the economy and speedup for the 5 trillion economy goal.
Answer: There are various public sector banks in India which has a significant share in economic development.
Managing various banks is not an easy task. Mergers can easy the process.
Answer: The Union Cabinet approves the mergers of banks.
Answer: A merger has good things as well as bad things. When it is done and how drawbacks are going to manage should be planned before the merger.
Answer: To increase the productivity of banks.
Answer: Banks will be merged on the basis of the same technical platforms to avoid technical complications.
Answer: The merger of banks will improve the overall financial health of banks. It has done in order to refine the working of banks.
Answer: Banks will join together and work under the name of a single entity
Answer: When one or more banks join together to improve the performance of the bank in the market it is called Merger of a bank.