Mergers during lock-down
While you and I were under lock-down from the 24th of March and all our social gatherings, marriages etc. had to be cancelled, there were four financial ‘marriages’ in the banking industry that happened quietly, without any pomp and splendor. There were small adverts that ran on the TV channels and print media, announcing the mergers. Nothing more. In this blog, I will examine the rationale and logic behind these mergers and whether reducing the number of banks by merging them, is indeed a panacea for making the banking sector healthy.
Anchor Banks and Amalgamating Banks
| S.no | Anchor Bank | Amalgamating Bank(s) | Combined Strength |
| 1 | Punjab National Bank (PNB) Deposits | a. Oriental Bank of Commerce (OBC) b. United Bank of India (UBI) | Branches : 10900 Business: Rs.17.91lakh crores |
| 2 | Canara Bank | Syndicate Bank | Branches : 10,300 Business : Rs.15.64 lakh crores |
| 3 | Union Bank of India (UOB) | Andhra BankCorporation Bank | Branches : 9,600 Business : Rs.15.08 lakh crores |
| 4 | Indian Bank (INB) | Allahabad Bank (ALB) | Branches : 6,000+ Business : Rs.8 lakh crores |
The rationale behind the mergers
Over the last decade, banks have been reeling under the onslaught of burgeoning NPAs and stricter provisioning norms mandated by RBI. On their own, the amalgamating banks perhaps would not have been able to survive for long. Is the rationale behind these mergers to make the banking sector stronger by creating monoliths, that would become ‘too big to fail’? It is expected that with the combined strength of the merged entity, these amalgamated banks would be on par in size with many global banks and would be able to compete effectively in lending. The thought behind the mergers also seem to be the intent to create 4 strong banks in this tranche of mergers and have 12 PSU banks overall, operating in the industry. While on the one hand, RBI is issuing banking licenses ‘on-tap’ and wants to increase the number of banks, this move of reducing the number of banks seems to be a step in the opposite direction. Perhaps, the intent is to slowly make way for more private sector investment in the banking sector and keep a few public sector banks as monoliths that can compete with them due to their sheer size!
Logic behind pairing of anchor banks with amalgamating banks
As mentioned by the Finance Minister, the selection of the anchor and amalgamating banks has been done based on the commonality in the technology they use, so that there are minimum challenges in migration and no disruption in customer service after the merger. While technology solutions used may be similar, the selection of OBC as an amalgamating bank for anchor bank PNB and Syndicate Bank as an amalgamating bank for anchor bank Canara Bank beats logic! In the case of the other banks that got merged, the strength of the banks in their respective geographies could bring in synergies. For example United Bank has a strong presence in the East and North East. This reach can be an advantage to PNB. Similarly, Union Bank can benefit from the extensive reach of Andhra Bank in Andhra Pradesh and Telangana and the reach of Corporation Bank in Karnataka and other southern states. Indian Bank and Allahabad Bank also have high synergistic possibilities. But in the case of amalgamating bank OBC and anchor bank PNB, this is not the case. Both have a strong presence in North India and this may lead to many of the branches of OBC rendered superfluous. Similar is the case of amalgamating bank Syndicate Bank and anchor bank Canara Bank. Both are strong in Karnataka and nearby states.
These mergers have rendered the inherent network strength of OBC and Syndicate redundant in many locations. In the process of branch and people rationalisation for cost optimisation, these two amalgamating banks may end up getting a raw deal. My discussions with several officers of these affected banks indicate this apprehension. The anchor banks need to be mindful of this and take action accordingly.
In conclusion : Mergers done, now what?
After the integration and rationalization post the mergers, are we to expect better management of risks and NPAs in these merged entities? That would be the expectation, but it would depend on how the merged entities are able to draw synergies from within. Only Time can tell whether the expectation will be met or not.
Post these mergers, we now have 12 PSU banks, down from 27 PSU banks, five years ago. Of the 12, there are six anchor banks i.e SBI, BOB,PNB, Canara, Union and Indian Bank. The banks that have been untouched by mergers are Bank of India (BOI), Bank of Maharashtra (BOM), Central Bank of India (CBI), Indian Overseas Bank (IOB), Punjab & Sind Bank (PSB) and UCO Bank. Some among them can qualify for becoming amalgamating banks. What is in store for them? Your guess is as good as mine! 😊
Hi Radha, great post. My own view is that unless the “PSU” tag changes, and banks are able to focus on their own asset quality without any coercion, I am not sure this will be very helpful. Conversely, banks will then also need to understand that the government will not bail them out each time there is a problem. It is this quid pro quo that is one of the key issues.
Thanks Mansab, for your comment. You have a point there. ‘Minimum Government, Maximum Governance’ seems to be the current dispensation. Let us hope this prevails and banks are able to take their own lending decisions. The idea behind the mergers is the creation of PSU monoliths that will not be allowed to fail while at the same time encouraging these banks to compete professionally. Let’s see how this pans out.
Hi lovely reads.. Thank you. I still see the space as maximum banks and minimum banking thru differentiated licences & tech propositions across segments. Unclear still seems the way forward intent of government.
The fundemental flaw remains as the viability of business models especially given the current serious impact to business conditions of MSME and sustained economic troubles over 3 yrs as well as cyclical disturbances as reality for banking segments.
Older regional Pvt. sector, mid size PSUs, RRBs and Micro fin turned SFBs’ liability and transaction banking business models are fragile in viability as well as can make unstable banking fraternity.
Is the right answer going to emerge for our country’s need of inclusive banking from business models or from multiple sized business entities and varied governance structure with the given supervisor / regulatory bandwidth is a tough puzzle.
Thanks Anantharaman, for your views on the banking sector. You are echoing what I and many others in the industry feel. We really don’t know where the sector is heading and how the government and RBI are looking at the sector.For now, some of the actions taken by them seem knee-jerk and lack vision. To add to it is the current pandemic situation. One doesn’t know which way the economy will go. Banks seem to be sitting tight and adopting a ‘wait and watch’ attitude. Would have loved to see some of them take charge and lead from the front. Perhaps the stakes are too high.
I appreciate that you have taken the pain to give your comments. Looking forward to more interactions from you on the blogs I write.