Merger and Acquisition of Indian Banks: Is it good for Indian Economy?

Merger and Acquisition of Banks in India and its effects has become a favourite topic of Group Discussion in FMS Delhi, IIMs, MDI, XLRI among others. Apart from other B-schools, FMS Delhi also placed this topic in the final selection round in 2018. Below is shared the solved write up on the topic.

 

It is but the desire for growth that acts as the fuel not only for an entrepreneur but also for every professional or corporation. This deep desire for growth in terms of customer base, balance sheet and profit has led the organizations engaging in mergers and acquisitions to move ahead and onwards in synergy.

 

The Indian Banks too did not stay aloof from this wave of mergers and acquisitions (M&A). Initially banks were merged to save non-performing banks or non efficient banks but as time evolved the system too evolved. In the recent times mergers and acquisitions have also been made on grounds of business growth, profitability and organizational restructure.

 

History of Mergers in Indian Banking
Mergers of banks began in India in the 1960s in order to bail out the weaker banks and protect the customer interests

 

During the period from 1961-1969 which is called pre-nationalization period because in 1969 the government nationalized 14 private banks as many as 46 mergers took place mostly of private sector banks in order to revive the poorly performing banks which proved to be quite a successful move for the underperforming banks.

 

The period from 1969-1991 called post-nationalization period. It saw six private banks being nationalized in 1980. In this period 13 mergers took place mostly between public and private sector banks.

 

The post liberalization period, which stretches from 1991-2015, saw major economic reforms initiated by Government of India. Many new policies were framed. Greater FDI and foreign investment was allowed which saw resurgence in Indian Banking. As many as 22 mergers took place - some to save weaker banks and some for the sake of synergic business growth.

 

Consolidation of Banks (2015-2017) – This phase saw five associates of SBI and Bhartiya Mahila Bank getting merged in SBI. The vision was to have strong banks rather than having large number of banks. This resulted in SBI being one amongst the 50 largest banks in the world.

 

As per studies conducted until now most of the mergers done in the past, have proved to be an overall success for the weaker banks although there are no concrete parameters to verify this observation. Hence going by the track record merger and acquisition in Indian banking have been fruitful for the Indian Economy.

 

The merger of Oriental Bank of Commerce with Global Trust bank in 2004 saved the latter after its net worth had wiped off and also handed OBC a million depositors and a decent market in South India. Mergers of Punjab National Bank (PNB) with  the then eroded New Bank of India (NBI) in 1993-94 and that of Benaras State bank Ltd with Bank of Baroda in 2002 also proved to be life saving for the weaker bank. 

 

Advantages of Mergers and Acquisitions

  • For the bank, retaining and enhancing its identity as a larger bank becomes easier. After the merger , benefits of merger are enormous and the biggest is generation of a brand new customer base, empowering of business, increased hold in the market share, opportunity of technology upgrade. Thus overall it proves to be beneficial to the overall Economy 
  • Provides better efficiency ratio for business operations as well as banking operations. This is beneficial for the economy
  • Minimization of overall risk is there due to mergers and acquisitions which is always good from the business point of view
  • Leads to increase in profitability and helps in raising the standard of living which is absolutely crucial for a growing economy like India
  • Chances of survival of underperforming banks increases hence customer trust remains intact which is vital for the Economy. The weaker bank gets merged into stronger one and gets the benefit of large scale operations.

Problems Arising due to Mergers & Acquisitions in Indian Banking
Most of the problems arising due to mergers and acquisitions are more emotional and social in nature than technical or managerial. The major problems which arise are:-

  1. Compliance needed in every decision which might not be favorable as thinking perspectives and risk taking abilities of different organizations are different. It leads to friction and rift which, if not managed well may lead to the downfall of the organization as a whole.
  2. Banks are merged only on papers. Their people and culture are difficult to change. It is a recipe for disaster as it leads to poor culture fit not ideal for the organization or the economy.
  1. Risk of failure increases if the executives are not committed enough in bringing the merger platforms together for the merging and taking over bank. Such failure may prove brutal for the Economy.
  1. Impact of customers on banking merger or acquisition is often quite emotional. If customer perception is not managed with frequent and careful communication it may lead to loss of business which is never good for the Economy.

Important But to Remain under Watch
Mergers are important for the consolidation and expansion purposes that is why in today’s scenario many private sector banks are genuinely interested in mergers and acquisition. They are also crucial for Economy as they are most of the times successful in saving weak banks which fail in meeting expectations.

 

Merger creates variety of problems which can cause great damage if the process of merging is not executed properly.

 

If merging is needed it must be executed in a manner which leads to an environment of trust and agreement among the people of both the organizations. If people, work culture and vision are blended together nicely, merging will definitely have synergic effects and create a win-win situation.

 

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