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Bank Mergers: Adding Fs makes no A

India has seen about 30 bank mergers since 1991, mostly of PSBs and the emerging experience and results are nothing great to write about.

 

Mergers and amalgamation of banks are common phenomena, in the banking industry worldwide. But while globally they are driven and done due to market compulsions, in India, since the banking business is under government monopoly, they are mostly done due to government mandates. Whether market-driven or mandate driven, bank mergers mostly take place at times of adversity, either in the economy or in the banking industry.

The Asian financial crisis of 1997-99 witnessed over 700 bank mergers worldwide, including in Asia, Europe and America. The global meltdown of 2008 also saw a spate of banking mergers, at a time when a behemoth like Lehman Brothers collapsed and industry leaders like Citibank went shaky. India has seen about 30 bank mergers since 1991, mostly of PSBs and the emerging experience and results are nothing great to write about.

Also Read: Merger Mayhem: Employees of PSBs strike a chord

The PSB bank mergers are founded on the 1991 Narishmam Committee report and have achieved little. The merger of New Bank of India into PNB achieved nothing, nor did that of United Western Bank into IDBI Bank, neither of GTB into OBC, which is being now merged into PNB, nor did ICICI Bank’s takeover of Bank of Rajasthan, Bank of Madura and Sangli Bank achieve anything significant and nor did the merger of five associate banks into SBI.

The only ones that made some sense were the takeover of ING Vysya Bank by Kotak and that of Times Bank and Centurion Bank by HDFC Bank. In fact, a research paper of BIS concludes that gains from bank mergers are weaker than those claimed. Another twenty-year global study of bank mergers found that they yield little gains in terms of managerial efficiency and economies of scale.

Bank mergers are driven by factors of cost reduction, revenue maximisation, benefits of size, preempting takeovers and managerial benefits, and these mergers of banks reducing 21 into 12 fail on them all, for the following factors.

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