MERGER AND INDIAN BANKS

MERGER AND INDIAN BANKS

The term merger may be defined as a mean of unification of two or more players into single entity. It may also be referred to as a process of bringing two or more business entities under common ownership through a series of legal and administrative measures. Bank merger is an event in which previously distinct banks are consolidated into one institution. When a merger occurs an independent bank loses its charter and become a part of an existing bank with one headquarters and is driven by unified control. Merger in Indian banking have been initiated through the recommendation of Narasimhan committee II.To enter the global financial market and to survey in high risk-oriented fields competing with the foreign banking giants, Indian banking industry badly need consolidation. Amongst the diverse ways to consolidate the banking industry most commonly adopted one is "MERGER". Merger of two weak banks or one weak bank with one strong bank is said to be faster and less costly way to improve profitability than spurring internal growth. Also it is better to have a big, healthy, strong and productive bank than to have several ailing and laggard banks.  One more major motive behind the merger in banking industry is to achieve, and economies of scale and scope. As the size increases the efficiency of system also increases. This is because the large operations enable banks to bring down the operative cost substantially, as the fixed cost is spread over a large base average cost , and this facilitates the banks to offer better rates to its customers. Indian banks are facing tough competition from their international counterparts as these foreign banks with huge capital base are able to offer loans to borrowers at attractive rates that makes Indian banks vulnerable to economic shock and political instability. These issues need to be addressed through through strengthening of capital base which is possible only through mergers and acquisitions. Mergers enables the banks to strengthen the capital base to comply with Basel Norms II also.  Mergers also helps in diversification of the products. The improvement in capital base enables the banks to take up new and diversified activities such as financing equities underwriting, insurance products, issuing assets etc. It thus paves the way for universal banking. Along with diversified activities mergers enables the banks to extend the business to various segments at many location across the country and globe. Hence risks are spread over various regions and segments that protect the banks from adverse business cycle and unexpected financial crisis. Despite the existence of proven hypothesis that "Big banks seldom fails" and the advantage that the banks enjoys due to mergers, there prevail certain drawback as well. In Indian banking industry the trend of merger has been so far restricted to reconstructing of weak and financially depressed banks as a bail out for weaker banks. In such case, though mergers succeeded in safe guarding the interest of weak banks it, without fail, adversely affects strong banks. Managing the emerged entity by the management teams drawn from two different banks is also a herculean task. Improving the quality of management is yet another challenge for banks. There are bound to be problems of corporate culture, values and approaches. Integrating work forces is always a tough task and any incompatibility i n process may result in gross insufficiency, defeating the very objective of merger. Human resources are another sensitive issue. Merger make some of work force redundant and banks are forced to undertake large scale redeployment exercise for effective use of human resource. Post liberalization, there has been several mergers like merger of New Bank Of India with Punjab National Bank , merger of Bharat Overseas Bank with Indian Overseas Bank, Times Bank with HDFC bank etc. in Indian banking industry driven by diverse motives like reconstructing of weak banks, expansion in terms of size, achievement of universal banking etc. The characteristics of these mergers were also different. Some of them were voluntary where as some were forced. The recent merger of State Bank of Saurastra and State Bank of Indore with State Bank of India has unveiled the merger process among public banks, many more may follow suit. It is time to look for synergy-driven mergers rather than forced mergers. Banks can reap the benefits of consolidation only when issues such as redeployment of surplus staff, integration of technology platforms, system and procedure and cultural issues are addressed suitably.

  

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