A merger is often a major event that can reshape an entity and lead to a change in fortunes. It becomes even more significant when it is between banks. Of late, bank mergers have become increasingly common and are leading to a shift in the Indian banking landscape. But what exactly are bank mergers and how significant are they?
In this article, we will look into the meaning of a bank merger, understand its significance and drawbacks, and explore the list of bank mergers that have happened in recent years.
What is a Bank Merger?
A bank merger is a corporate restructuring process where two or more banks combine into a single entity. Usually, this consolidation process often results in a larger bank absorbing smaller banks. Bank mergers are extremely complex processes that involve legal, financial, and operational integrations between the merging entities.
What are the Objectives of a Bank Merger?
Now that you know the meaning of a bank merger, let us look at the various strategic objectives of this restructuring activity.
- Economies of Scale
One of the major objectives of a bank merger is to achieve economies of scale by spreading costs over a broader customer base, eliminating redundant operations, and streamlining processes. This often leads to significant cost savings and improved operational efficiency, resulting in better profits in the long run.
- Improved Financial Situation
A bank merger consolidates the financial resources of multiple banks into one entity. With the enhanced capital, the merged entity can enhance its market position, meet the regulatory requirements, and increase its lending capacity.
- Enhanced Risk Management
A bank merger creates a larger, more diversified bank that is more capable and better equipped to handle the various business risks, economic downturns, and market fluctuations.
- Business Expansion
A bank merger enables the merged entity to enter new geographical markets and customer segments far quicker compared to the traditional method, which usually involves significant time, money, and effort.
- Product Offerings
Another reason why banks opt to merge is to enhance their product offerings. The merged entity can offer a wider range of financial products and services to customers, which diversifies their risks and could even boost revenue generation capacity.
- Technological Advancement
A bank merger could provide the merged entity access to advanced technology and digital banking capabilities, enabling it to enhance customer experience by providing innovative banking solutions.
- Increased Competitiveness
A merger between banks is undertaken to increase competitiveness. Since the merged entity is often large with significant financial resources at its disposal, it may be better positioned to compete in the domestic and global financial markets.
What are the Challenges associated with a Bank Merger?
Understanding what a bank merger is and its advantages is not enough. You must also be aware of the various challenges that are often associated with this event. Here is a quick overview of some of the key challenges.
- Regulatory Approval
For a bank merger to go through, it needs approvals from multiple regulatory authorities, especially the Reserve Bank of India. Navigating the strict regulatory scrutiny to ensure compliance with anti-competition laws and other financial regulations can be time-consuming and expensive.
- Branch Closures
A bank merger, especially between two entities with the same geographical presence can lead to overlapping branch networks. Consolidation of such overlapping branches could lead to closures, impacting both customers and employees.
- Technological Integration
The integration of technologies of different banks, especially if they do not use the same platforms, can be incredibly complex and may take significant time to complete.
- Operational Disruptions
A bank merger often takes time. The entities involved may face temporary operational and service disruptions during integration. These interruptions can prove to be expensive and may even lead to customer dissatisfaction if not handled swiftly.
- Cultural Integration
A bank merger not only involves the integration of technologies and financial resources but also organisational cultures. Combining two distinct cultures can be challenging and may even lead to employee dissatisfaction.
List of Bank Mergers in India
Now that we are done exploring the meaning of bank mergers, their objectives, and their challenges, let us look at an all-bank merger list. The mergers in this list are what India has witnessed in the recent past and were driven primarily by the government’s efforts to strengthen the country’s banking sector.
- State Bank of India Merger with its Associates
One of the most significant consolidations in this list of bank mergers is the one involving the State Bank of India (SBI). SBI is India’s largest public sector bank with numerous associate banks operating independently. In a bid to increase efficiency and consolidate the number of public sector banks, the government of India announced a merger of the SBI and its various associates.
With effect from April 1, 2017, the following associate banks were merged with the State Bank of India.
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Indore
- State Bank of Saurashtra
- State Bank of Hyderabad
- State Bank of Travancore
- State Bank of Bikaner & Jaipur
- Bharatiya Mahila Bank
- Punjab National Bank, Oriental Bank of Commerce, and United Bank of India Merger
Another major consolidation event in this all-bank merger list is that of Punjab National Bank (PNB). PNB, a popular Public Sector Bank, absorbed two smaller PSU banks: Oriental Bank of Commerce and United Bank of India. The merger happened on April 1, 2020, and made PNB the second-largest public sector bank in India in terms of business and branch network.
- Bank of Baroda, Vijaya Bank, and Dena Bank Merger
India’s first-ever three-way bank merger involved Bank of Baroda (BoB), Vijaya Bank, and Dena Bank. The consolidation process was initiated on April 1, 2019, as part of the government of India’s plan to merge smaller banks with larger PSBs to increase operational efficiency, improve service delivery, and address Non-Performing Assets (NPA) concerns.
According to the terms of the merger, Dena Bank and Vijaya Bank merged with the bigger entity – Bank of Baroda. As a result, BoB third-largest public sector bank with a total business of more than Rs. 14.82 lakh crore.
- Canara Bank and Syndicate Bank Merger
Syndicate Bank was a public sector bank with limited reach and branch network. To increase the bank’s capital base and reach, the government of India announced a merger of Syndicate Bank with a much larger PSB: Canara Bank.
After the merger on April 01, 2020, Canara Bank became India’s fourth-largest public sector bank in terms of assets. The bank now has more than 10,000 branches and over 12,000 ATMs, making it very well-connected.
- Union Bank of India, Andhra Bank, and Corporation Bank Merger
Another three-way bank consolidation in this list of bank mergers, the absorption of Andhra Bank and Corporation Bank by the Union Bank of India (UBI) was a strategic merger designed to reduce the number of PSBs and increase the merged entity’s footprint.
The merger came into effect on April 01, 2020, along with other similar mergers, and propelled the Union Bank of India to become the fifth-largest PSB. It also helped Andhra Bank and Corporation Bank, which were both small institutions with limited reach and insufficient financial cushion to deal with economic downturns.
- Indian Bank and Allahabad Bank Merger
Allahabad Bank was the oldest public sector bank in India. However, the institution was struggling with Non-Performing Assets (NPAs) and insufficient revenue due to dwindling business.
Therefore, the government of India planned to merge it with Indian Bank with effect from April 01, 2020. The merger made Indian Bank the seventh-largest public sector bank in India and significantly improved the institution’s financial standing.
Conclusion
With this, you must now be aware of what a bank merger is and the various mergers that have taken place in India in the recent past. In addition to the ones mentioned above, the country has also witnessed other mergers.
The merger of HDFC Limited with HDFC Bank Limited on April 04, 2022, was one of the largest among private-sector banks. Although the merger was between a bank (HDFC Bank Limited) and a housing development finance corporation (HDFC Limited), the consolidation was very significant and further strengthened the already dominant position of the bank.
Another private-sector bank merger that made waves in the Indian banking industry was between IDFC First Bank Limited and IDFC Limited. This was again a merger between a bank and a non-banking financial institution structured to simplify holdings, improve management and efficiency, and unlock shareholder value.
FAQs
Why do banks merge?
Some of the key reasons why banks merge are to expand their market reach, reduce expenses, increase operational efficiency, bolster their capital reserves, and enhance their product and service offerings.
How does a bank merger impact customers?
Bank mergers usually positively impact customers by providing them with access to a wider range of products and services, improved technology, and a larger branch network. That said, customers may face a few disadvantages, such as changes in the terms, branch closures, or temporary service disruptions.
Are bank mergers always successful?
No. Bank mergers may not always be successful. Some mergers may fail due to overvaluation, regulatory challenges, or inability to retain customers. The success of a bank merger often hinges on factors like cultural integration, technology compatibility, and the ability to effectively utilise synergies between the entities.
Can bank mergers be good for the economy?
Yes. Bank mergers can benefit the economy by creating more stable institutions with enhanced lending capacity and the ability to weather economic downturns. Strong banking institutions are often the backbone of an economy.
Is the concept of bank mergers new?
No. Bank mergers are not new. In fact, India has witnessed several mergers between banking institutions since independence. The frequency of mergers, however, has gone up recently due to the government’s efforts towards creating a strong and stable banking landscape in the country.
