Bank Merger; Everything you need to Know about India’s Biggest Merger

Bank Merger 2019 India

Bank Merger Introduction

Recently Modi government has announced the biggest bank merger in India after the Banking Nationalisation in 1971. This is said to be the biggest banking reform since then.

Finance Minister Nirmala Sitharaman has announced this Bank Merger just a few days back. Few experts on the subject say this is going to be the biggest step to strengthen the banking system. While some others are labeling it mere showcase step. 

 Meanwhile, FM has already said how this merger is going to benefit the whole economy and employment rate also. Though effectively no new jobs would be out after this step you can expect no jobs shed also. 

People were afraid of losing jobs but it looks like this step is going to save more than just the financial system. 

Today we are going to analyse this whole announcement and its effect on retail investors pocket also. How this merger will affect the account holder, shareholders and financial system as a whole. 

Have we done it earlier also? If yes then was it resulted in a positive trend? Everything you need to know about this big Bank merger theory. Stay tight grab your cup of tea/coffee let’s unravel the mystery which needs to analysed now. 

Let’s get started with the basics.

What’s Bank Merger and Acquisition?

Bank Merger is a situation when two or three banks come together to pool their assets and liabilities to become one bank. These are done with the purpose to reform the financial industry mainly because banks want to remove or diminish their share prices falling trend. 

Bank Merger isn’t a new concept coined by our FM, It was done earlier also. But the financial system was never so weak.

Acquisition, on the other hand, means when one particular company/Bank purchases all or partial stake in another bank to gain control of the firm. This way they can control the company if they have more than 50% share in the company.

You need to purchase more than 50% shares of a company to have the right to control the firm’s decision-making process. The acquisition comes with limited liability but the merger has no limit on the liability front. 

Both have their own merits and demerits, It depends on the Bank merger policies under which they are coming together. 

As I said there is a long history behind bank Merger, likewise there is a long bank merger list also. History has seen multiple bank mergers. 

That’s recent bank merger news isn’t new for financial Investors but the impact and why it has been done is surely something new. 

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Why Bank Merger is done?

 If you have understood ‘What’s bank merger?’ properly only then you are ready to grasp this.

Bank mergers are normally done with the purpose to strengthen the weakened financial industry, not all the time but most of the time. 

In 2017 State Bank of India Merged with its five associates named State Bank of Patiala, State Bank of Bikaner & Jaipur, State Bank of Raipur, State Bank of Hyderabad, and State bank of Travancore with Bhartiya Mahila Bank (BMB).

When SBI undertook its five associate banks, it wasn’t a move because SBI was weak or financial system was weak. It was solely because these banks were not able to work effectively and with less capital, these were unable to control NPA. 

So, the Reason Behind any Bank Merger might be different. Sometimes it’s done to strengthen the banks, sometimes it’s done to control the rising NPA reason could be anything. The Main inference is Merger is never done because of any positive reason and it shows the weakness of our Finance Ministry, RBI and Government. 

Just think of it as this way; let’s say we have 10 biscuit manufacturing firms in the country. So what’s best having 10 different firms and eating 10 different varieties? Or having only 2 firms in the country and give rise to minute monopoly (Oligopoly) of those. In that (only 2 firms) you won’t have many varieties, you can’t shift if you don’t like one particular company’s biscuit.

How it affects the Shareholding pattern and Retail Investors?

This year’s merger is surely going to strengthen the financial system. So after this merger, we can see some short term upward trend in the share market pattern but only for the short term.

Rising NPA and deteriorating asset quality aren’t going anywhere. Banks are merging but their valuation and problems are going to be the same. Huge NPA and decreasing profits because of the low margins will create problems for banks afterwards also.

India’s is experiencing one of the best saving habits but due to effective policies, we are unable to use that money to develop better money and employment generating assets. 

For retail investors, this would be a big relief. They can come out of there stagnated investments if they want after this merger and a sudden increase in the share prices. 

Are Bank Merger’s beneficial in India (In General)?

Bank’s Merger is surely a good idea but only when you are doing it to give it more power and autonomy. Not when you are just trying to save the sinking ship with false promises. Bank Merger 2019 is sure looks one financial System reform bubble to save the economy.

As we talked earlier also, this is not the first time when Indian financial system is experiencing a merger or acquisition. Since 1972 we have seen multiple such mergers, because of different reasons but yeah. 

For years, committees have suggested a merger on different accession and for a different reason. Starting from M. Narsimha Rao committee till now merger has been seen as the last resort of all financial problems. 

Narsimha committee had also suggested that it’s better to have less number of banks with better working performance, good asset quality than having a huge number of loss generating banks. The logic was rather than having several of its state banks fighting for the same small pie (loans and advances); we need less number of banks but with better services. 

But that was then, now we have a huge population, around 3 trillion dollar economy and best saving habits in the world. Do you think banks like State bank of India can handle and encourage more saving and habits in Indian populations? Do you remember what the banking situations just a few years back were? Banking officials were treating their customer like shit. Several banks rose and the customer was started treating with respect. 

At least I don’t want to go back to that time when Going to SBI was like suffering. 

Though M. Narsimha committee believed that the Banking merger was necessary especially in the bigger cities and towns. It was also argued that bigger entities would have a better opportunity to interact and trade in the international market because then they would have enough capital to make any trades. 

Yeah, this is where merger looks good, but why can’t we make our banking system strong enough to stand alone. Federal bank is also one commercial bank but it alone handles India’s more than 15% inward remittances. 

Mr Rakesh Jhunjhunwala is having huge stakes in the federal bank due to its incomparable strength and asset quality. We need more banks like Federal Bank. 

The finance minister said after the merger these banks will able to compete globally and improve their operational efficiency once they lower their lending rate and increase their loan disbursing process. 

But looking at the present situation it looks like one impossible dream. None of India’s banks makes the list of top 50 Biggest Global banks, not even India’s biggest SBI. Looks like, finance minister needs to do little more research on Indian and International financial Industries. 

Which Banks are going to merge in India (Bank Merger News)?

The finance minister has announced four new banks after merger. The first set of merger includes Punjab National Bank, Oriental Bank of Commerce and United Bank of India. All these will make India’s second-biggest lender. 

The second set includes Canara Bank and Syndicate Bank. The third set of mergers include Andhra Bank, Corporation Bank and Union Bank of India. 

Fourth and the last amalgamation of banks include Indian Bank with Allahabad bank. 

After the merger, it is expected that these banks will have more autonomy and power to improve their efficiency. All these banks will constitute four major banks of India.

This is not all; six PSU banks will remain independent; Uco Bank, Bank of Maharashtra and Punjab and Sind Bank, Indian Overseas Bank. These have a strong regional presence that why these will continue to work separately and independently. 

Central Bank of India and Bank of India are also two major banks which will continue to work separately.

After this huge merger nation would have 12 PSU banks including State Bank of India and Bank of Baroda. Hopefully, then these will work better than now. 

The merger of Oriental Bank of Commerce, United Bank and Punjab National Bank will create a bank with more than Rs. 17.90 lakh crore business and 11,437 Branches. 

The second set of merger which includes the merger of Canara Bank with Syndicate Bank will create a bank with Rs. 15.20 lakh crore and branch network of 10,324. 

The third set merger which includes Andhra Bank, Corporation Bank with Union Bank of India will create India’s fifth-largest bank of India with Rs. 14.59 business with around 9,609 branch network across the globe. 

The fourth set of Banks which includes the merger of Allahabad Bank with Indian bank will create a seventh-largest bank of India with Rs. 8.10 lakh crore and a strong network of branches all over India. 

Bank Merger list 2018

As I said mergers in India are very common. Last year Finance Minister has announced the Bank merger of Dena Bank, Vijay Bank with Bank of Baroda. 

This was also done to strengthen the Indian financial system but we all know the present situation. 

How Banks are chosen to merge? 

The question arises here is how banks are chosen to merge. Though there is no rocket science in choosing which banks will be merged but there are few rules to keep in mind.

As finance Minister Nirmala Sitharaman explained that this merger has been done with one thing in mind and that is customer satisfaction. The government always sees how the bank’s business will be getting affected after the merger. 

If there is any business disruption in banking services and how these banks will be benefited from each other’s higher Current and Saving Accounts and reach. 

Before the merger, it has been discussed by the government officials and RBI officials whom banks are working better in which geographical region and what lacks in these. How they can perform better. After discussing many factors they decided which banks to merge with which one. 

Like if we look at the merger of this year, Bangalore-based Canara Bank may get benefited from Syndicate Banks strong presence and long experience. 

Another best example can be of the merger of Andhra Bank and Corporation Bank which have a better and strong presence in the south may be complemented by Union bank’s stronger presence in West and elsewhere. 

Why FM is taking Bank Merger Step Now

The economy is on the verge of recession, not only in India but Europe, China, US are all nearing to the recession. Chinese Yuan is falling so is Indian Rupees. 

Experts are also opined on the fact that After the Chinese Yuan touched its eleven years, rupees are under huge pressure. 

Indian financial system is under tremendous pressure. Yes Bank, IDFC Bank, PNB, Uco, Corporation almost every other PSR or Private bank’s share price is either stagnated or falling. Sensex and Nifty aren’t performing as expected with the start of the year.

Unemployment is rising and we need more jobs to save the economy from entering into never-ending unemployment cycle. You must have read about the Parley G case. 

Jobless Economy was never a good idea. So finally the finance minister found this marvelous idea to save the economy and increase the employment ratio. 

Exports were revived in 2018 after five years are falling again. Manufacturing growth has fallen to a mere 0.6%. 

We are already experiencing a non-banking financial institution arising from the fall of IL&FS. 

Budget and its latest revived policies have already sent huge money out through FPI. Sensex has lost more than 3000 points. 

Last week, Finance Minister announced her economic revival plan which was later labelled as too late and too little. People also said this looks like she is trying to aid big accident with just band-aid. Economy and industries are falling and she is merging banks. What about the Auto sector, Pharma Sector, NBFCs etc. 

Our financial industries are indeed suffering most but it’s not a competition. Right. 

Right now what I see as the biggest problem coming is after the merger instead of strong & big banks lifting the weak and sinking banks, weak banks might sink the stronger ones. 

Earlier this year also when Bank of Baroda was merged with Vijaya Bank and Dena bank it was expected that it will improve its share price. But what it performed exactly opposite. Bank of Baroda share falls from Rs, 156 a year ago to Rs. 90-92. The same story was seen in 1992 at the time of PNB’s merger. 

This is how the Finance Minister is trying to revive the financial institutions. 

Bank Merger Impact on Individuals

When something changes retail Investors and Individuals are impacted most and this is the species which need to know. Below I have listed a few things which you must need to know when Bank’s merges. 

Here is how you are going to get impacted;- 

1. The first thing you need to do is change your cheque book. Though it is valid now but only for the temporary period. You must need to change it before the next fiscal year. 

2. You must be having your ISFC code and Account number for various online transactions, auto-credit of salary, auto-debit of various other services charges/bills etc. Unless these are seamlessly merged into the financial system of the newly merged bank, you would be required to change these details given for various purposes. 

3. Debit/Credit may need to change issued from the merging banks. Exchange these with the merged bank’s Debit/Credit Card. 

4. Paperwork of fixed deposit and other such time deposit will increase as these have to be transferred with the merging bank. 

5. Shareholder of publicly listed banks will be impacted. By how much will be announced once the swap ratios are announced.

6. A plus point of this merger is that you will have more branches which can be accessed easily. You can enter into any of your merged banks and can access your account. 

So, these 6 points must be kept into your mind. Bank Merger is a big thing. When this is happening it looks like we needed more planning to minimize the arising cost. 

Why India’s Biggest Bank merger might be a failure.

With new policies in the picture, we have two groups analyzing the policy separately. We have one group appreciating the Bank merger decision another group is surely not in the favour of this decision.

We have 1992-1993 examples when PNB was merged with the Delhi-Based Indian bank which was surely a total mess. Ok, let’s assume that was the time when India was going through the big breakthrough of LPG policies. But still, it took years to PNB to make peace with the changed management.

We have the last year’s merger of Bank of Baroda, Vijaya Bank and Dena Bank. This was also done with the purpose to reform the Banking structure and push the stock prices but what happened was severely & entirely suffered by the Investors only. 

Bank of Baroda was trading at Rs. 150 at the time of the merger then our government decided to merge these bank and Share price of Bank of Baroda went down to Rs. 90. 

Let’s see what happens in this merger. Whether the strong banks lift the weak banks or weak bank sinks the strong banks. Just the matter of time when all this decision/mergers effect will be visible.

Economist’s theory of ‘no matter whether the cat is black or white as long as it is catching the mice.’ Let’s see is this random mouse catches the mice or disrupts the house itself. 

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Conclusion 

This was all from my side in Bank Merger. We have huge experience of this and every time we have lost against the economy’s movement. 

I don’t know why Finance Minister Nirmala Sitharaman took this step but if this improves the economic conditions that care. Right? 

Don’t know how this Bank Merger news will improve the situations of NBFCs, Auto Sector, and Pharma Sector etc. But if she has done this let’s hope for the best. Steps like this won’t make India one 5 trillion dollar economy, if she has something else in her pocket she needs to pull out that right now. 

This band-aid won’t stop the falling rupee or falling economy. 


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