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The Financial Impact of Merger and Amalgamation on Banking Sector

The Financial Impact of Merger and Amalgamation on Banking Sector
Dashmeet Kaur
| Updated: Nov 25, 2019 | Category: SEBI Advisory

The present-day scenario of the banking sector has become nothing but a battlefield. Wherein, every bank strives to overpower the other by forming new financial schemes. The safest way to escape competition is to take shield under Merger and Amalgamation. It is the most effective method of merging two different entities into one entity.

Liberalization and other policies enforce the banking sector to break the boundaries of comfort and innovate peculiar ideas. So, it is the fundamental need for banks to extend their operational activities. This blog will help you evaluate the impact of Mergers and Amalgamation on the performance of the banking sector.

An outline of Merger and Amalgamation

As per the Oxford dictionary, the Merger or Amalgamation is the combination of two companies into a single company. Moreover, it is the unity of two similar business concerns in one.

Merger refers to the fusion amidst two or more organizations in which the identity of one gets lost that result in a single organization. Whereas, Amalgamation means the blend of two or more companies into one whereby all the companies involved lose their identity. It results in the formation of a sperate legal identity.

Reasons to employ Merger& Amalgamation in Banks

Banks merge and amalgamate for these objectives:

  • It helps to lower the level of competition in the market.
  • To enlarge the market further without expanding the competition.
  • The bank gains more assets by the assimilating resources of both banks.
  • To have access to more capital despite investing less amount.
  • Once two banks unite their customer base also becomes double.
  • Lastly, it gives an opportunity to compete across the globe.

Henceforth, the impact of Merger and Amalgamation makes a significant change in boosting the productivity banks. Besides, it underpins those banks that seek to grow in the market but do not possess the required resources and capital.

Government view on Merger of Banks

In August 2019, the Finance Minister, Nirmala Sitharaman [1] announces the merger and amalgamation of 10 public sector banks into four big banks. Subsequently, it created a series of major boosters for the economy of the banking sector.

A week later, the Central Government says that the merger will reduce the total number of Public Sector Banks in India. The numbers will come down from 27 to 12 banks. Apart from that, the Government also proclaims upfront capital infusion of Rs 55,250 crore in the PSBs.

Highlights of the Story:

  • As per the Finance Minister Nirmala Sitharaman, the Canara Bank and Syndicate Bank shall get merged into a single entity. Whereas, the Union Bank of India, Corporation Bank, and Andhra Bank will get amalgamated as one entity.
  • Likewise, the Indian Bank and Allahabad Bank will become one entity.
  • Further, Nirmala says that the Central Bank of India and Bank of India will continue to persist independently.
  • Later to the amalgamation, only 12 PSBs will remain in the country from the earlier count of 27.
  • In consequence to the merger and amalgamation, Punjab National Bank will emerge as the second-largest PSB in India having a total business of Rs 17.5 lakh crore.
  • Also, the total business of the merged entity of Syndicate Bank and Canara Bank reckons up to Rs 15.20 lakh crore. Hence, it will become the fourth largest PSB in India.

The Aftermath of Government Announcement 

Here are some apparent changes that one can foresee after the announcement of the Finance Minister:

The Amalgamation of United Bank, PNB, and OBC will form the 2nd largest PSB with Rs 18 lakh crore revenue. Being the second-largest branch network, it will drive nationwide & global presence, and high CASA.

Consolidated Allahabad and India Banks shall hold the position of 7th largest PSB with Rs 8.08 lakh crore business. It will provide substantial scale benefits to both along with high CASA & lending capacity to the newly consolidated bank.

The Merger of Union, Andhra, and Corporation Banks will attain 5th largest PSB position with Rs 14.6 lakh crore business. It will become the 4th largest branch giving strong scale benefits to all the 3 banks.

Impact of Merger and Amalgamation on Banking Sector  

It is undeniable that the Merger of smaller banks with the larger banks will be a perfect union and will create a win-win situation for both. Government has strategically decided to amalgamate those banks who exhibit different financial strength. For instance, the Punjab Bank and Indian Bank are more robust as compared to the banks with whom they have been merged according to the plan.

  • In Nirmala’s presentation, she declares some governance reforms like strengthening the power the of bank board.
  • This decision was taken to address the fundamental issue of political interference in the state-owned banks.
  • Further, she adds that the Merger and Amalgamation of banks will suffice the funding needs and improve the growth of the economy.
  • As per the decision, the Merger will increase the lending capacity of the larger banks than smaller banks because of the difference in their capital base.
  • Consider the case of Punjab National Bank. When it gets merged with the Oriental Bank of Commerce and United Bank of India, then it will gain the stature of the second-largest bank with a business of Rs 18 lakh crore.
  • Despite the firmness in the decision of Government, many investors raise questions against it. They believe that the role of the larger banks maybe not enough in regards to funding big business projects.
  • Taking the example from the past, various small banks came together to merge and extend their loans facility, which result in a successful venture.
  • Hence the impact of Merger and Amalgamation is more of a positive one in the financial and banking sector.

Conclusion

After the announcement of Bank Merger, the shares of India Bank and other strong banks beholds a steep fall. The dilemma still exists whether operational benefits will come through the merger of banks.

Thereby, it will fix the deteriorating condition in the finances of the larger banks. Besides, the Merger and Amalgamation will help those banks who suffer due to bad loans. After merging, they can extend loans without the fear of getting bankrupt.

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Dashmeet Kaur

Dashmeet Kaur is an experienced content writer, having proficiency in writing Legitimate content with comprehensive research. She also has a keen eye to detail and incorporating accurate facts.

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