A banking merger occurs when two or more banks pool their assets and liabilities to come together under a single charter. Typically, the merged entity retains the name of the stronger bank, taking over the others.
The landscape of Indian banking has shifted dramatically through these consolidations. In 2017, there were as many as 27 Public Sector Banks (PSBs); as of 2022, after a series of massive mergers, that number has been reduced to 12.
Timeline of Major Recent Mergers
The recent consolidation drive followed several key phases:
- 2017: State Bank of India (SBI) merged with its five associate banks and the *Bhartiya Mahila Bank
- 2019: Vijaya Bank and Dena Bank were merged into the Bank of Baroda.
- 2021: A massive consolidation saw 10 Public Sector Banks merged into just 4.
Why Merge? (Arguments in Favor)
The government and proponents of mergers cite several strategic advantages:
- Managing the NPA Crisis: Mergers allow “strong” banks to absorb the financial strain on the books of weaker banks, providing a pathway out of bad loan issues.
- Creating Global Banks: Consolidation helps create globally stronger and more competitive financial institutions that can compete on an international scale.
- Efficiency and Expansion: Mergers reduce operating costs and allow for geographical expansion. For instance, merging Vijaya Bank (strong in the South) with Dena Bank (strong in the West) provided the new entity with wider nationwide access.
- Regulatory Compliance: Larger banks have a bigger capital base and higher liquidity, which helps them meet strict international BASEL III norms.
Challenges and Risks (Arguments Against)
Despite the benefits, there are significant concerns regarding these forced consolidations:
- Impact on Strong Banks: Forced mergers can take a toll on the operations and profitability of the stronger “parent” banks.
- Systemic Risk: Consolidating banks creates entities that are “too big to fail,” which can pose a serious risk to national financial stability if one faces a crisis.
- Human Resources and Technology: Aligning different HR practices and contrasting corporate cultures is a major roadblock. Furthermore, harmonizing various banks that operate on different technology platforms is a massive technical challenge.
- Setback to Financial Inclusion: Many smaller banks cater to specific regional audiences; merging them may destroy the decentralization needed for local financial inclusion.
Historical Context
This shift was not sudden. As we discussed earlier regarding reforms, the Narasimham Committee-I (1991) originally proposed a substantial reduction in the number of PSBs to bring about greater efficiency. The Narasimham Committee-II (1998) later reinforced this by recommending the merger of major PSBs to boost international trade.
To visualize Public Sector Bank Mergers: Think of the Indian banking system as a convoys of different-sized ships (the banks) sailing across a rough ocean (the economy).
- Previously, there were 27 ships. Some were massive tankers, but many were small, leaky boats struggling to stay afloat due to heavy “cargo” (NPAs).
- The Merger is like taking those small, struggling boats and physically welding them onto the sides of the large, sturdy tankers.
- The Benefit: Now, you have fewer, massive ships that are much harder to sink. They can carry more supplies, use one large engine instead of ten small ones (Cost Efficiency), and sail into deeper, international waters (Global Competitiveness).
- The Risk: However, the engineers now have a nightmare trying to get different electrical systems to work together (Technology Harmonization), and the crew members from the small boats might not like the rules on the big ship (HR Issues). Most importantly, if one of these now-massive ships does hit an iceberg, it’s a much bigger disaster for the entire fleet than if a single small boat had sunk.