Friday, July 18, 2014

Pros AND Cons Of Bank Mergers

The talk of bank mergers is thicker in the air now, than never before.  It is reliably learnt that the government at the centre is really serious this time, as this subject has been touched under Point No.129 on Page No.24 of Union Budget for 2014-15 submitted in the Indian Parliament by Hon’ble Finance Minister on 10-07-2014.   So, what is in the offing?  What will be the effect of bank mergers?  What do mergers mean to ordinary employees?  What are their implications and consequences?  Whether bank mergers are good or bad in Indian context?  We will analyse all these points from various perspectives hereunder.
S No
Favourable Effects
Adverse Effects
Overall Picture

The size of each business entity after merger is expected to add strength to the Indian Banking System in general and Public Sector Banks in particular.
It will be difficult to precisely assess the impact of mergers in quantitative terms, at this juncture.  We must know the terms of merger, before embarking on such exercise.
Indian Banks can slowly and gradually evolve/transform themselves into global banks.
Nevertheless, this process may take another 5 to 10 years.

After merger, Indian Banks can manage their liquidity – short term as well as long term – position comfortably.  Thus, they will not be compelled to resort to overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
Mergers will result in shifting/closure of many ATMs, Branches and controlling offices, as it is not prudent and economical to keep so many banks concentrated in several pockets, notably in urban and metropolitan centres.  Though the closure or merger of a large number of branches will not happen all of a sudden, it is bound to happen over a period of next 5 years.
The number of public sector banks will come down, perhaps to 6 or 7, after the proposed consolidation of banks.  This will end the unhealthy and intense competition going on even among public sector banks as of now.   While professional competition in the market place is welcome, unhealthy competition leads to many unethical practices and regulatory violations as noticed at present.
Mergers will result in immediate job losses on account of large number of people taking VRS on one side and slow down or stoppage of further recruitment on the other.  This will worsen the unemployment situation further and may create law and order problems and social disturbances.

The plight of people taking pre-mature retirement (through VRS route or otherwise) will turn more pitiable than being envisaged.
Even now, public sector banks in India hold 77% market share. Therefore, the new banks, after merger, will give the private sector banks a good run for their money.
Financial inclusion plans may be affected and their deadline for their implementation may be delayed.  ‘Direct Benefit Transfer’ (DBT) of government aid, subsidies and grants also will be affected.
In the global market, the Indian banks will gain greater recognition and higher rating.
The bank accounts linked to ECS and demat records are to be changed.  This is a laborious, time taking and expensive exercise.
The volume of inter-bank transactions will come down, resulting in saving of considerable time in clearing and reconciliation of accounts.
The Head Office of the banks after merger will be situated at a far off place, may be more than thousand kilometers away from different branches situated at different corners of the country.
The burden on the central government to recapitalize the public sector banks again and again will come down substantially.
Different banks have different goals, priorities and business strategies.
The overall profitability of mergers is expected to improve.
This presumption may go wrong also.
Banks’ Financial Health

For meeting more stringent norms under BASEL III, especially capital adequacy ratio, the larger banks need not struggle.
The weaknesses of the small banks may get transferred to the bigger bank also.  The amalgamation of Global Trust Bank with Oriental Bank of Commerce in 2004 is a case in point.
S No
Favourable Effects
Adverse Effects
Synergy of operations and scale of economy in the new entity will result in savings and higher profits.
We cannot prevent lethargy, discontentment and conflicts among the staff.  To tackle this problem, many staff-friendly steps on the H.R. front are essential.
Many controlling offices have to be closed.
This may result in data losses on one side and dilution of control on the other.
A great number of posts of CMD, ED, GM and Zonal Managers will be abolished, resulting in savings of crores of Rupee.  
For the top positions of the banks, whose number will get reduced in the post-merger scenario, there will be tough and ugly competition.
Similarly, in many banks, the GOI’s nominee and RBI’s representative on the bank boards will lose their jobs.  This will not only save considerably huge money, but reduce their unnecessary interference in day to day affairs of the banks.
This may loosen the control of RBI over larger banks.  There is also a likelihood of a large scale irregularity escaping the immediate notice of RBI, but surfacing much later.  This will spoil the reputation and credibility of individual banks and the regulator (RBI).
Organisational Climate/Culture

Casteism and Provincialism will diminish to a great extent.  A semblance of cosmopolitan outlook and culture will unfold.
New power centres will emerge in the changed environment.
The new organizational entity will be able to take bold and quicker decisions, provided there is adequate clarity in communication coupled with decentralization and delegation of authority.
Since the number of bank branches will be large, managing them may pose greater challenges.  It is estimated that each bank will have not less than 8,000 branches, after merger.
Fresh blood and fresh thinking will get infused in the new entity.  Better systems also may be introduced, to make the work life of the employees more comfortable and enjoyable.
Mergers will result in clash of different organizational cultures. Conflicts will arise in the area of systems and processes too.
Individual employees may not get noticed, even when they are successful, unless they have a godfather in the organisation.
Over-importance given to systems and procedures will result in absence of human touch in each and every function of the new entity.
Human Resources

After mergers, bargaining strength of bank staff will become more and visible.  Bank staff may look forward to better wages and service conditions in future.
Banks will be compelled to offer another round of VRS, especially to those above 50 years of age and to those having more than 25 years of experience in the same bank.
Though VRS this time may not be a ‘golden handshake’ like the one offered in 2001, it will definitely be a better offer than the ordinary VRS now available under pension regulations.
Banks will lose thousands of talented and experienced personnel at a time, resulting in serious crisis at the middle and senior management levels.
The wide disparities between the staff of various banks in their service conditions and monetary benefits will narrow down.
People working in the larger bank (acquiring bank) will try to dominate the personnel working in the smaller bank (acquired bank).  Thus, the latter will be treated as second class citizens in the new, merged entity.
As the network of branches, after mergers, will be evenly distributed across the country, the threat of transfers to far off places will diminish for officers up to MMGS III.
Staff identified as surplus in many pockets (urban and metros) will be transferred to far off places.  This will create turmoil and widespread protests. It will take minimum 3 years for the disturbances to subside and for the peace to return in the new organizational space.
Banks can spend more money and other resources, for the training and development of their employees and officers.
Promotional avenues for staff after merger will come down.   In promotions, the staff of the acquiring bank will have a lion’s share, leading to strong discontentment, rivalry and open disputes.
Employees will get wider exposure in the changed environment and new opportunities will open up for them.
Too much dependence on more sophisticated technology will result in loss of human values.

S No
Favourable Effects
Adverse Effects
Trade Unions

Trade Unions will have more numerical strength in the new organisation.
The trade union leaders will become more arrogant and self-centred.
Trade Unions will be flush with funds.
Many Trade Union leaders will lose their prominence and even positions, in the new set up.
In the Trade Unions, dominance of one section, one linguistic group and one geographical region will come down.
Representatives of both the officers and award staff in the old/acquired banks functioning as Bank Directors will lose their director post.
Customer Service

Customers will have access to fewer banks offering them wider range of products at a lower cost.
The customers do not have any say in deciding the identity of the bank with which their existing bank is going to be merged.
Customer service will improve vastly due to advanced technology, improved systems and better ambience of bank branches.
Initially, the customers of both the banks will find it difficult to deal with new set of people, their attitude and style of functioning.
Monitoring, Regulation and Control

From regulatory perspective, monitoring and control of less number of banks will be easier after mergers.  This is at the macro level.
For 2 years from the date of merger, several problems will crop up in the area of reconciliation of accounts, updation of records etc.   Especially in Suit Filed Accounts, SARFAESI/DRT Cases, Written off Accounts, this problem will be acutely felt.  In the meantime, cases of fraud and   misappropriation/embezzlement may also be reported.
Larger banks will have more stability and strength, making the job of the regulator easier.
When a big bank books huge loss or crumbles, there will be a big jolt in the entire banking industry.  Its repercussions will be felt everywhere.

The fall in the share price is only temporary and within a few months, the prices will recover automatically.
After merger, the share price of the merged entity will fall immediately. 
The loss on account of decrease in dividend amount will be soon be made up by appreciation of stocks in the market.
The rate of dividend also will diminish during the first two or three years following mergers.
General Public

After mergers, all public sector banks will be extending all types of services.
There will be some confusion initially.  It will be difficult to remember the name of the banks which have been grouped together and amalgamated.
While deposit interest rates may go up marginally, loans may become cheaper.
Poor people will hesitate to step into bank premises that wear rich looks and display posh furniture.   Fully air-conditioned branches will increase exponentially.

My Suggestions
  1. The government shall not have any hidden political agenda, in bank mergers.
  2. All stakeholders must be taken into confidence, before the merger exercise is started.
  3. After mergers, shares of public sector banks shall not be sold to foreign banks, foreign institutions and Indian corporate entities, beyond certain limit.
  4. Whenever further divestment (dilution of government holdings) takes place, the government share holdings shall not fall below 51% under any circumstances.  This will ensure that the ownership and control of public sector banks remain with the government.
  5. The restrictions on voting rights as existing now must continue, without any change.
  6. The central government shall not rush through the process of bank mergers.  It requires a careful study in depth and sufficient time to implement the scheme of mergers.  In my assessment, a 2 year time horizon is reasonable and adequate for this purpose.
  7. The decision with regard to selection of smaller/weaker banks for merger with larger/stronger banks is to be taken carefully and grouping of various banks for this purpose is the key issue involved.  The government shall not yield to pressure from any political or social groups.
  8. The acquiring bank shall not attempt to dominate or subsume the acquired bank.  Good aspects of both the banks before merger shall be combined, in order to instil confidence in all stakeholders and to produce better results.
  9. Personnel absorbed from the smaller bank (acquired bank) will be required to undergo brief, intermittent training programs to get acquainted with the philosophies, processes and technology in the new environment.  The management must be ready with a good roadmap for this and allot considerable budgetary resources for this purpose.
  10. In case of shareholders, proper swap ratio (one share of the new entity for so many shares of the banks before merger) must be fair and acceptable to all.
  11. The inconvenience and discomfort caused to bank staff shall be kept at the bare minimum level and job losses/reduction on account of VRS or resignation shall be factored in on a realistic basis and adequate compensation must be awarded to those who quit their service, for whatever reasons, after the mergers.
  12. There shall be conscious and organized efforts to synthesize the differing organizational cultures, for the mergers to yield the desired results.

Date: 14-07-2014                                                                                                                     pannvalan

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