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The merger of banks is a particular situation when two banks club their assets and liabilities to become one bank. The merger has many common motives like Diversification, Tax Purpose, Increase in financial capacity, and many more. The merger may include certain challenges like Tech interaction, Human resources, decision making, and provisions. When India faced the problem of economic slowdown then, Nirmala Sitharaman, the finance minister, announced the ten public sector banks into four entities to boost the economy by increasing its liquidity, combating the issue of nonperforming assets, and diversifying the risk.
About Bank
A bank is an organisation that deals with finance where customers deposit, save and borrow money. There are two categories of banks Public and Private. In Public sector banking, the majority stake is held by the government. In the case of private sector banking, most of the equity is owned by private bodies, corporations, and institutions instead of the government.
Bank Mergers
Mergers, announced by the finance minister Nirmala Sitharaman, are important for consolidation and expansion purposes. To compete with the world, India needs a more global level of banks. The government deals with the problem of merging. If vision, people, and work culture are apt, merging will synergise and create a win-win situation. The procedure of banks merger works under the Banking Regulation Act,1949. Any two Public sector banks can initiate a merger discussion. The government should finalise the merger scheme in consultation with RBI and must be placed in parliament for approval. Parliament has the right to reject or modify the merger scheme. Parliament approval is necessary for the merger between public and private banks. Mergers have advantages as larger banks are capable of facing global competitiveness. A merger will help in improving professional standards. The merger will help the geographically concentrated regionally present banks expand their coverage. After the merger, the staff works under a single umbrella regarding their service conditions and wages. Banks merged are:-
- Punjab National Bank, Oriental bank of commerce, United bank of India.
- Canara Bank and syndicate bank.
- Union Bank of India, Andhra Bank, and Corporation Bank
- Indian Bank & Allahabad bank.
Meaning of Banking Merger
When two banks club their assets and liabilities to become one bank, a particular situation is known as merging banks. The government announced the ten public sector banks into four entities in 2019. It is basically to reduce the cost of lending. Mergers may have pros and cons. It reduces the cost of operation. NPA and risk management are benefited. It sees a bigger capital base and higher liquidity that reduces the burden of recapitalising. Mergers may also help in financial inclusion and broadening the geographical reach of the banking operation. Certain banks have regional customers to cater to, and merger destroys the idea of decentralisation. The merger may be a temporary relief, but it’s not a real remedy to the problem. It may include bad loans and bad governance in public sector banks. The positive effect of bank mergers is good global competitiveness as the large bank is capable of facing global competitiveness. It boosts the economy. Indian banks can gain recognition and higher rating that can have the possibility to emerge as a global bank.
Benefits of Banking Merger
The cost of banking operations is reduced by the initiation of mergers enacted by Nirmala Sitharaman, resulting in the betterment of non-performing assets and risk management. A larger bank can easily manage its short and long-term liquidity. The merger may have the benefits like a brand new customer base, empowering business, increased holding the market share, and opportunity for technology to upgrade. A large bank is capable of facing global competitiveness. Indian banks can gain greater recognition in the global market as global banks. When a merger occurs, it will reduce the cost of operations too. The weaker banks get merged into the stronger ones and benefit from large-scale operations. For example, the state bank of India, Bank of Inda, and syndicate bank are in a small town. A merger can replace all the branches into one, resulting reduction in operational costs and improved efficiency.
Conclusion
The merger of banks is important for consolidation and expansion. It is also crucial for the economy. The problem of Non-performing assets is piled up not because of small banks but the inefficient policies to do with NPAs. To meet global competitiveness, India needs more global level banks. The government deals with the problem related to mergers and will decide the success of merging. Merging must be executed to lead to an environment of trust and agreement among the people and the bank. The Finance minister, Nirmala Sitharaman, announced the bank merger in 2020, resulting in seven large PSBs with scale and national reach. It helps banks create a scale comparable to global banks and capable of global competitiveness.
