Mergers and Acquisitions

Potential Impact of Mega Bank Mergers

Merger or an amalgamation is considered as a situation where the business of two or more entities becomes into a single entity. While the transaction and process behind a merger are time-consuming, the benefits of the merger have to be considered. The process behind a bank merger is complex and involves a large number of parties that contribute to the successful event of the merger. In all the industries, the process of merger is beneficial to the development of the merged entity. This will also indirectly contribute to the increase in the number of products offered by the merged entity, integrated technology services, economies of scale, new customers, increased profits and large scale operations. The main benefits of a merger are for businesses to improve their operations and reduce competition.

Apart from the above benefits, the merger markets have their drawbacks as well. Therefore, before proceeding with a transaction, it is important to conduct research and due diligence for both the entities. By conducting the above, the transaction can effectively take place smoothly without any difficulties. This procedure and merger process would be there irrespective of the type of business considered. In the banking business, mergers take place in order for the bank to gain access to new customers, products and economies of scale and scope. Mega bank mergers take place throughout the world, and the main purpose behind the merger is to improve the accessibility of bank.

Potential Benefits and Drawbacks of Bank Mergers

Though there are benefits of bank mergers, there are also potential drawbacks which the banks have to evaluate as a reason for the merger. Therefore, it is important to understand the benefits and drawbacks of the mega banks mergers. Mega Bank mergers have the following benefits and drawbacks:

• Increase in the number of consumers– Through the mergers, banks can consider a wide amount of customers. After the merger process takes place, many consumers would get access to the number of products which are offered by the bank. Increase in the number of customers will directly affect the banking business, such as the increase in the number of deposits which the banks would have. Apart from this, more number of accounts would be opened by the customers. This will directly improve customer response satisfaction as banks would be more diligent in providing services to customers.

• Increased Operational Efficiency– Through the merger process, the banks would get economies of scale and scope. This means that banks would be more efficient when it comes to transactions which involve the business community. Operational efficiency not only includes the processes in which banks operate but also considers and involves the integration between different banking departments. The banks would be able to get more integration for the products and services offered by the banking process. New forms of technology would be added to the processes of the merged entity. Similarly, when a small bank merges with a larger bank, customised financial and revenue products which are offered by the smaller bank will be offered by the merged entity.  Apart from this, there will be a transition in the efficiency of accounting and human resources department. Mega bank mergers help in reducing the amount of financial risk of the bank while increasing the number of performing assets which is present with a bank. This will indirectly affect the banking processes offered.
• Streamlined Process reduces the number of gaps in the business– When banks merge, the operational efficiencies are improved. This would reduce the number of gaps present in the banking industry. Creation of loans would be simpler.  New forms of products can be streamlined into the business processes of the bank. The merger would allow the bank to use products which are already developed by other banks. Products need not be developed from scratch. Mega Bank mergers help in improving the overall process of operations in the bank.
• Increase the amount of Talent– This is one of the main benefits of the merger process in a bank. The merged bank would have access to increasing talent in the form of human resources that can add value to the development of processes related to the banking business. Mega Bank mergers are beneficial to the bank.

However, there are various disadvantages/ drawbacks in the merger process related to banks. Some of the drawbacks of bank mergers are as follows:

• Geographical Barriers– As banks merge; they would get access to new geographical areas. This is a major challenge to the bank as new products and services have to be offered to geographical boundaries. Added to this would be language barriers which may be a challenge to navigate through.
• Cultural Boundaries– Previous customers are not open to hearing challenges such as the merger of the bank. Some customers are used to the traditional forms of the banking process. If the present culture of the merging banks is not similar, then the merger can even fail. Apart from this, the banking business can even collapse if there are many cultural boundaries in the banks.
• Increased amounts of risk– While there is more number of products that are offered by the banks, the amount of risks also increases. For example,- two banks may be offering similar products and services; however, if the Information Technology database used for banking products are different, then this would be considered as a major risk. The merged bank or entity must ensure they streamline a new IT system in the merged entity.

Mega Bank Mergers- The current scenario of Public Sector Undertakings

The largest consolidation of banks has occurred. The Mega Bank Mergers is between 10 public sector banks to create 4 public sector banks. Finance Minister Nirmala Sitharaman considered that this merger process should take place.  In the financial quarter of 2018-19, the profits of the banking industry were low. This was considered in the 4^th quarter of 2018-19. In the 1^st quarter of 2019, there was an improvement in the amount of revenues of the bank.  Only 6 of the banks showed remarkable performance in the last quarter of 2018-19.

In order to reduce the amount of competition amongst banks and to increase growth nationally, this step was considered. Mega Bank Mergers would not only affect economic growth nationally, but it would considerably improve the growth at a global level. Previously the Union Government considered the merging process for different banks. State Bank of India merged with five associate banks and another public sector bank. Though the system was effective, there were a lot of complications post-merger of the bank. In 2019, there was a merger process between Dena Bank, Vijaya Bank and Bank of Baroda. After the merger process, these banks were not considered as separate entities but considered as a single entity. The finance minister with the view of making the economy reach USD 5 trillion considered that mega bank mergers should take place.

Mega Bank mergers are taking place with 10 public sector banks to make it into 4 public sector banks. The following Mega Bank Mergers are:

• Oriental Bank of Commerce (OBC) and United Bank of India (UBI) are being consolidated by Punjab National Bank (PNB) which will make the second largest public sector bank after State Bank of India. The new entity would have a banking business of almost 18 lakh crore and have more than 11,500 branches in India.
• Syndicate Bank will be amalgamated into Canara Bank, which will make the bank the fourth-largest public sector bank in India. The new entity would have a banking business of 15 lakh crore with more than 10,324 branches across India.
• Corporation Bank and Andhra Bank will be merged with Union Bank of India making it the fifth-largest public sector bank in India. This entity would have banking business of 14 lakh crore with more than 9609 branches across India.
• Indian Bank will be merged with Allahabad Bank making it the seventh-largest public sector bank in India. This entity would have more than 8 lakh crore business in India.

From the above, the impact of the mega bank mergers would create more competition with the private sector banks. Apart from this, these banks would offer new forms of products to existing customers.  This merger process between the banks took place on 01 April 2020. Before this merger was about to take place, the Finance Minister discussed with the senior executives of the major banks the possible outcomes of the merger.

• Some of the main points that were discussed before the Mega Bank Mergers were the following:
• An increased amount of credit standing post-merger scenario
• To minimise the disruption amongst the customers of the bank
• To engage the customers with new products
• To ensure that there is no credit crunch in the finance system
• Ensure that banking services are provided to consumers, and there is no disruption in the streamlined process of the bank
• The budgetary requirement of the bank and plan of action related to finance

On the long run, the process of the mega bank mergers would be beneficial to the economy. It would make the banking and financial system of India stronger on the global outlook. Therefore this process of mega bank mergers is required for economic progress.

Impact of the Mega Bank Mergers

The consolidation would make sure four established banks have been set up.  Banks which do not have proper operational efficiency or having non-performing loans would gear up and get proper operational framework from stronger banks. Apart from this, banks which have technology and Information technology integrated platforms would perform better if these processes are streamlined in an efficient way.

As a method of financial injection, the government of India has given Rs 68, 855 crore for the banking merger plan. Out of this budget, Rs. 16000 crores were given to Punjab National Bank. Union Bank of India was given Rs 11,768 crore; Canara Bank was given Rs 6,571 crore. Indian Bank was given more than Rs 2500 Crore. Allahabad Bank was provided Rs 2,153 crore, United Bank of India Rs 1,666 crore and Andhra Bank was given Rs 200 crore.

With this in hand, the Government wanted bank business in India to strengthen as an effect on the merger. The following figures reveal the post-merger scenario of the impact of the Mega Bank Mergers:

	Punjab National Bank  (Post Merger Scenario)	Canara Bank (Post Merger Scenario)	Indian Bank (Post Merger Scenario)	Union Bank (Post Merger Scenario)
Loan Book Size (Rupee Crore)	684500	632800	323500	577000
Casa Ratio (In %)	40.5	30.2	41.6	33.8
NET NPL (In %)	6.4	5.6	4.4	6.3
PCR (In %)	59.7	44.3	66.2	63.1
Tier 1 Equity Ratio (in %)	8.3	9.8	9.8	10

The above table shows the figures of the Mega Bank Mergers, post-merger scenario.

Comparing the above the following can be understood:

• Current Accounts Saving Accounts– CASA have the features of both current accounts as well as savings accounts. The percentage offered under the CASA system is lower than the amount of interest that is offered on deposits. Therefore banks prefer using the system of CASA. Banks would encourage customers to go for the system of CASA rather than the system of deposits.  The CASA figures of Indian Bank are considered the highest when compared to other banks.
• Net NPL– This refers to the Net amount of nonperforming loans of the banks.  Non Performing loans are the loans in which the borrower has not paid the proper amount of principal and interest on the loan amount. By not paying the loan within the stipulated period of time, the loan becomes a non-performing loan. There are certain changes in the amount of the percentage of NPL.
• Provisional Coverage Ratio (PCR) – The provisional coverage ratio is also known as the PCR ratio. This ratio is considered as the provision what the bank makes for a bad debt. These provisions are made on the profits which are obtained by the bank through regular business. Indian Bank has the highest Provisional Coverage Ratio.
• Tier Equity Ratio– Tier equity ratio is the ability of the bank to meet a crisis scenario. This is the amount of liquidity present in banks in crisis situations. The Tier 1 equity ratio shows that Union bank has the highest amongst all the merged banks.

In light of these figures, the mega bank mergers prove beneficial to the Indian Economy.

Issues related to the Mega Bank Mergers

Though there are many benefits of the Mega Bank Mergers, there are also potential drawbacks of the merger process. The following are the issues related to the mega bank mergers:

• Changes of Banking Documentation– With the effect of the merger, some banks would change the documentation. Documents such as cheque books would have to be updated. This would be a significant issue for a large number of customers. Ultimately the cheque book will have to be updated to the book which is used by the merged entity.
• Updating of Indian Financial System Code (IFSC Code)/ Automatic Credits – Mega Bank mergers have to take place smoothly. When certain banks merge, the business process should be effectively streamlined in order to avoid considerable issues to consumers. Such instances are when the IFSC codes are not updated with the merged entity. Apart from this, systems such as automatic credits would also be largely affected. When there was a merger of SBI with associate banks, such issues were faced by consumers in major metropolitan hubs. This was considered a significant issue because of the mega bank mergers.
• Exchange of Credit Cards/ Debit Cards– These has to be exchanged for the cards that are issued by the merged entity. Cards used by customers of previously merged banks would work for a specific period. However, there may be certain disruptions.
• Compliance and Paperwork– Compliance and paperwork related to the merged bank would definitely increase as the process of the Mega Bank Mergers.
• Marginal Cost of Funds based Lending Rate (MCLR/ Loans Borrowed) – This is considered as the minimum interest rate that can be charged by the bank for lending. There would be changes for individuals who have taken loans from banks before merging.
• Listed Banks– Banks have their securities listed in public stock exchanges. The shareholders would be affected who have acquired shares of the banks. This would depend on the swap ratio. Swap Ratio is considered as the ratio which the acquirer offers to the target company for the swapping shares.
• Information Technology – When banks merge, there has to be effective IT systems in place for effective integration. This is a major challenge which is faced by banks post-merger process. There will be no problems related to information technology and digitisation systems if both banks use the same software. For example- Consider Punjab National Bank, Oriental Bank of Commerce and United Bank of India. All these banks use Infosys Finacle software. This software is considered as the Core Banking Solution for banking services. Therefore, in the above case, the smooth integration of IT services in banking would be possible. Even if the banks have different versions of the software then the systems have to be updated to the latest software.
• Corporate Governance- Mega Bank Mergers bring out a lot of governance and administration issues related to the business of the bank. Governance is considered as having effective standards of transparency in the business. Post-merger, there may be issues related to governance. Hence an effective framework of governance is required for the banks to operate.

Mega Banks Merger- Issues created due to COVID-19

Though the merger between the banks occurred on 01 April 2020, there would be doubts related to issues such as the effect of the COVID-19 lockdown on the pre-merger and post-merger process. Some of the challenges faced by the merging banks:

• Training to executives– Post Merger, there were issues related to training of Human Resource due to the lockdown. The executives opted for video conferencing process for training related to the merger process.
• Documentation/ Submission of Documents– Document submission process would also be disrupted due to the lockdown as many authorities were temporarily closed.
• Customer Interaction – Public conferences for informing customers about post-merger issues would also not be allowed due to the lockdown. The banks would have to resort to having conferencing through video means or postponing it.

The process of merger between the banks was not prohibited by COVID-19 but only disrupted to a specific extent.

Conclusion

There are many benefits and drawbacks in the bank merger process. The mega bank mergers have reduced the amount of operating public sector banks in India. Through the merger, the Government of India decided to increase the strength of banks on a domestic as well as an international front. With the merger, the banks would be able to achieve an increased number of customers, economies of scale, access to new banking products and integrated technology. Though there are many benefits for the banks, there are equally a lot of drawbacks. These drawbacks have to be faced by the customers and shareholders of the bank. Some of the drawbacks are documentation issues, credit/debit card issues and issues related to corporate governance. These drawbacks can be removed if the systems related to banking processes are streamlined in an effective way. Even though mega bank mergers have many drawbacks, the benefits outweigh the drawbacks.