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Mergers and Indian banks
The term merger may be defined as a mean of unification of two or more players into single entity. It may also be referred to as a process of bringing two or more separate business entities under common ownership through a series of legal and administrative measures. Bank merger is an event in which previously distinct banks are consolidated into one institution. When a merger occurs an independent bank loses its charter and becomes a part of an existing bank with one headquarters and is driven by a unified control. Mergers in Indian banking have been initiated through the recommendation of Narasimhan committee II.
To enter the global financial market and to survive in the high-risk-oriented field competing with foreign banking giants, Indian banking industry badly needs consolidation. Amongst the drivers ways to consolidate the banking industry the most commonly adopted one is ‘merger’. Merger of two weak banks or merger of one weak bank with one strong bank is said to be the faster and less costly way to improve profitability than spurring internal growth. Also it is a better idea to have one big, healthy, strong and productive bank than to have several ailing and laggard banks. One more major motive behind the mergers in banking industry is to achieve economies of scale and scope. As the size increases the efficiency of the system also increases. This is because the large operations enable the banks to bring down the operative cost substantially, as the fixed cost is spread over a larger base reducing average cost, and this facilitates the banks to offer better rates to its customers.
Indian banks facing tough competition from their international counterparts as these foreign banks with huge capital base are able to offer loans to borrowers at attractive rates that makes the Indian banks vulnerable to economic shock and political insatiability. These issues needs to be addressed through strengthening of capital base which is possible only through mergers and acquisitions. Mergers enable the banks to strengthen the capital base to comply with Base II norms also.
Mergers also help in the diversification of the products. The improvement in capital base enables the banks to take up new and diversified activities such as financing equity underwriting insurance products, issuing asset-based security providing new delivery channels etc. It thus paves the way for universal banking. Along with diversified activities mergers enable the banks to extend the business to various segments at many locations across the country and glove. Hence the risks are spread across various regions and segments that protect the banks from adverse business cycle and unexpected financial crisis.
Despite the existence of proven hypothesis that “Big banks seldom fail” and the advantage that banks enjoy due to mergers, there prevail certain drawbacks as well. In Indian banking industry the trend of mergers has so far been restricted to restructuring of weak and financially distressed banks as a bail out for weaker banks.In such case, through mergers succeed in safeguarding the interest of weak banks it , without fail, adversely affects the health of strong banks. Managing the merged entity by the management teams drawn from two different banks also a Herculean task. Improving the quality of management is yet another challenge for banks. There are bound to be problems of corporate culture, values and approaches. interesting work forces is always a tough task, and any incompatibility in the process may result in gross Resources another sensitive issue. Mergers make some of the work force redundant and banks are forced to undertake large scale redeployment exercise for effective use of human resources.
Post liberalization, there has been several mergers like merger of New bank of India with Punjab national bank, Merger of Bharat Overseas Bank with Indian Overseas Bank, Times bank with HDFC etc. in Indian banking industry driven by diverse motives like restructuring of weak banks, expansion in terms of size, achievement of universal banking etc. The characteristics of these mergers were also different. Some of them were voluntary where as some forced. The merger of State bank of Saurashtra and state bank of indore with State bank of India has unveiled the merger process among public banks, and many more may follow the suit. It is time to looks for synergy driven mergers rather than compulsive/forced mergers. Banks can reap the benefit of consolidation only when the issues such as redeployment of surplus staff, integration of technology platforms, systems and procedures and cultural issues are addressed suitably.