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The Big Bank Merger: Pros and Cons

18 Sep 2019

Last month, the government of India unveiled a mega plan to merge 10 public sector banks into four as part of its plan to create fewer and stronger lenders. Finance Minister Nirmala Sitharaman announced four new set of mergers –

1. Punjab National Bank, Oriental Bank of Commerce and United Bank of India will combine to form the nation's second-largest lender

2. Canara Bank and Syndicate Bank will merge

3. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank;

4. Indian Bank will merge with Allahabad Bank.

The history of bank merger dates back to the 1960s in order to bail out the weaker banks and protect the customer interests. All the mergers in all sectors are driven primarily due to business reasons. Banking mergers also happens due to growing ‘Non-Performing Assets’ and less lending that throws a bank into being the loss-making entity and burden on shoulders of government.

No matter how big the merger or what the stature of the participating banks, there can be no doubt that a merger is a big step, and sectors beyond the financial world are affected by such a move. Banking mergers comes with its own advantages and disadvantages to all the stakeholders that somehow get affected from this:

Advantages of Bank Merger:

1. Merger helps to reduce the cost of operation

2. It helps to improve the professional standard

3. Provides better efficiency ratio for business operations as well as banking operations which is beneficial for the economy

4. Multiple posts get abolished, resulting in substantial financial savings

5. Banking mergers improve risk management

6. Merger helps the geographically concentrated regionally present banks to expand their coverage

Disadvantages of Bank Merger:

1. Acquiring banks have to handle the burden of weaker banks

2. It is difficult to manage the people and culture of different banks

3. Merger destroys the idea of decentralization as many banks have a regional audience to cater to and customers often respond very emotionally to a bank acquisition

4. Larger banks are more vulnerable to global economic crises

5. Coping with staffers' disappointment could be another challenge for the governing board of the new bank which could lead to employment issues

Key Takeaway:

Mergers are important for the consolidation and expansion purposes. That is the reason even many private banks are getting attracted towards this. Mergers in past have given great results in terms of saving weak banks which fail in meeting expectations, hence the are crucial for the economy of the country.

We, at CapitalVia Investment Advisor, feel that merger (if needed) should be carried out with the utmost care and executed in a manner which leads to an environment of trust and agreement between both the organizations. If these things are taken care properly, it can create a win-win situation.

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