Bank merger in India: What are the pros and cons?

New Delhi, Sept 21: Nowadays, a lot is being said and written about merger of public sector banks. In 2017, the Government of India decided to merge five associate banks of State Bank Group with State Bank of India (SBI). Recently, a similar move was made aiming at merging Bank of Baroda with Vijaya Bank and Dena Bank. And this could not be last one either.

The aim of creating an Indian bank that will in an international league of giants is there since the early 1990s.

In 2017, post the merger, the SBI was in the process to rationalise its branch network by relocating some of its branches to reach the maximum number of people. The SBI believed that such a move would help it optimise its operations and also benefit profitability. In 2018, Rating agency Fitch said the merger of the three banks could bring about material operating efficiencies over a period of time by lowering the combined operating costs, stronger risk management practices, etc. There are also voices who said that because of this merger, Bank of Baroda, the best among the three, would have to share a baggage on its shoulders.

There are both advantages and disadvantages of merger of banks.

The advantages are:

• It reduces the cost of operation
• The merger helps in financial inclusion and broadening the geographical reach of the banking operation
• NPA and risk management are benefited
• Merger leads to availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more in small banks
• The disparity in wages for bank staff members will get reduced. Service conditions get uniform
• Merger sees a bigger capital base and higher liquidity and that reduces the government's burden of recapitalising the public sector banks time and again
• Redundant posts and designations can be abolished which will lead to financial savings

The disadvantages of merger:

• Many banks have a regional audience to cater to and merger destroys the idea of decentralisation.
• Larger banks might be more vulnerable to global economic crises while the smaller ones can survive
• Merger sees the stronger banks coming under pressure because of the weaker banks.
• Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks
• Coping with staffers' disappointment could be another challenge for the governing board of the new bank. This could lead to employment issues.