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Banking and Insurance October 31, 2017

Indian Bank’s Merger – A Good Idea?

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Mergers and Acquisitions are probably the toughest calls managers take. The exercise involves substantial groundwork, ‘due diligence’ as you term it, and the results aren’t always as expected; a study claims that around two-third of all M&A deals ‘fail to create value.’ And when it is about mergers in the Indian banking space that is riddled with high non-performing assets and lack of capital, extra caution is desired (Also read: How To Tackle Banking Sector Woes?) since these aren’t just any entities, they hold public money hence any misfire can have a ripple effect on the economy.

India’s ministry of finance and top think tanks have contemplated merging of ailing public-sector banks, and the general consensus is that this is the only way to overcome odds and script a new success story. Once implemented, this can be labeled as the second most radical reform in the sector post nationalization of banks in 1969. Any comparison between the two reforms, however, is uncalled-for since the state of the economy then and now is different and so is the purposebehind these moves.

Before going ahead with the proposal, here is what the government should consider.

Taking cues from the recent unification of India’s largest bank – SBI and its associate banks isn’t a bad idea. Most news outlets reported this as an event that ‘catapulted’ SBI into 50 largest banks by assets globally; rarely did anyone deliberate on the burden of NPAs that SBI will have to absorb and the absence of any alleged ‘economies of scale or efficiency and cost-cuts’ in the deal. Amid all the rhetoric, what SBI truly gained or will gain is still a question unanswered, and it will take at least a couple of years to boil down to a judicious conclusion.

Points in favour

The financial services sector has been taken over by the wave of technology. Small PSU lenders have been unable tosustainthis shiftwith their products and manner of functioning becomingobsolete as well as less cost-efficient. Lenders that can raise capital from the market owing to their strong balance sheets and customer base can be the only helping hands to the small ones who also are stuck at the bottom when government mulls infusing capital viathe budgetary process. 

If mergers are carried out sensibly, by way of devising a strategy to rationalize the workforce and shut down loss-making branches, while at the same time recruiting younger professionals who are tech-savvy and havenot been a part of the laidback work culture that has marredPSU banks, strong, efficient and productive banking companies can come into play.

Verdict

‘Large and less’ isn’t the guarantee for economic viability.In any case, the government would need to inject capital into state-run banks to meet Basel norms for capital adequacy. The temptation to have large banks with huge assets and geographical reach must not overshadow pragmatism. Many entities even split to reap the benefits of specialization and focused approach.Any merging of public sector banking companies has to be backed by rationales, not rhetoric.

Also read: How Big Data Analytics Is Redefining Banking Sector?

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2 responses to “Indian Bank’s Merger – A Good Idea?”

  1. Prakash Chauhan says:

    No matter how much consolidating banks is being favoured, the truth is that India needs more banks. Along with experimenting with consolidation, RBI should continue to give more licences to small banks as well.

  2. Balwinder Saxena says:

    Benefits of consolidation – Acquiring economies of scale, cost saving, bridging geographical gaps, efficiency gains, revenue enhancement etc

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