MEGA BANK MERGER 2020- ASPECT AND IMPACT : BY RIYA BHARDWAJ

 

The government on March 4, 2020 has notified the merge of 10 state owned banks into four as a part of its consolidation program to create bigger size stronger public sector banks.[1] As far as the merge is considered, the branches of Oriental Bank of Commerce (OBC) and United Bank of India will operate as branches of Punjab National Bank, Syndicate Bank will merge with Canara Bank, Allahabad Bank will merge with Indian Bank and the branches of Andhra Bank and Corporation bank will amalgamate with the branches of Union Bank of India. As per the official order, the Customers of Amalgamating banks are now account-holders of Anchor Bank. The amalgamation will provide customers of all three banks access to a larger number of branches, ATMs and other services. There are certain variables like economic conditions, government policies, sectoral outlook, growth momentum, customer demand and easy availability of cheap credit which affect both market and the economy. Hence, with an increased market share, the economies of scale will improve and Anchor Bank is expected to become more profitable. However, the customers are required to make cash and cheque deposits in branches of the parent bank only. Also, the loan facilities existing in the amalgamating banks are to be governed by the guidelines and policies of Anchor bank.

Amalgamation and the Employees

The merger might have its own set of advantage and disadvantage. But the consent of the employees and office bearers of both amalgamating bank and the anchor bank is ignored.  As per the theory of Professional Ethics the bank must take actions for enhancement of motivation of their employees in all service units, and for provision of services under better conditions, and ensure the creation and maintenance of a healthy and safe work environment. However, with the amalgamation of banks with the anchor bank, employees of both the amalgamating banks and the anchor banks suffer.

The allowances paid to the employees of the Anchor bank would be enjoyed by the employees of the amalgamating bank too. According to the theory of profit sharing,[2] profit must be shared between the employees and the employers equally. The anchor bank becomes successful because of the hard work, organizations and strategic skills of its employees. However, when the Anchor bank amalgamates with other banks, the profit-earned is shared by the employees of the amalgamating banks too. In the year 2019, PNB had done a total business of Rs. 11, 82, 224. On the other hand OBC and United bank of India did a total business of Rs. 4, 04, 194 and Rs. 2, 08, 106 respectively. When these three banks are amalgamated, the total business of Rs. 17, 94, 526 would be equally benefitting the employees of all the three banks.[3]

When it comes to the employees of the amalgamating bank, their working system isn’t given due recognition in the official order. In fact, there is no guideline regarding the management of these banks after amalgamation. The posts of office bearers of the amalgamating bank are not defined once the banks are merged. This creates vagueness in the hierarchy of system. Post-amalgamation, the executive director of Allahabad bank K Ramchandran has been appointed as the executive director of the Indian Bank. Ms. Padmana Chunduru is the MD & CEO of the Indian Bank. Since, the amalgamation of the Indian Bank to the Allahabad Bank, the Indian Bank’s work is ought to be guided by the principles of the Allahabad Bank. However, as the MD of Indian Bnak, Ms. Chunduru is the most senior in the hierarchy and she has the direct control over the management of the bank. The official order fails to understand the role of Mr. Ramchandran after the amalgamation of these two banks and hence, the hierarchy of office bearers after the amalgamation remains undefined.

Failure of Previous Amalgamation and non-acknowledgement of the poor conditions of the Anchor Bank

After its merger with five associate banks two years ago, SBI’s bad loan problems only grew. This has resulted in write-offs and which has hampered its profit and capital. The merger of Bank of Baroda with Vijaya Bank and Dena Bank last year had been a failure right from the from the beginning, given the weak finances of Dena. One year on, BOB’s hampered credit growth only confirm the fundamental issues with forced mergers. These mergers were based on amalgamating banks operating on a similar core banking solution. The current merges are based on the same principle. Re-experimenting on a failed issue, without changing any variable (in this case the basis of the merge) is bad economics. Also, the main objective of this consolidation scheme is to make public sector Banks stronger and bigger. However, amalgamating weak banks with weaker banks isn’t going to serve the purpose. Since, the loan facilities existing in the amalgamating banks are to be governed by the guidelines and policies of Anchor bank. With the infamous fresh frauds like the Nirav Modi scam and its own NPAs[4] at over 16 per cent, the amalgamation of PNB with OBC and United Bank will debilitate it further.

Conclusion

Covid-19 has impacted the already lower GDP of India drastically.[5] Implementing such a step during or after the pandemic is over will definitely hit the GDP hard. It is expected that with the amalgamation of different banks, the market shares will increase and this will eventually increase the GDP. However, as per the theory of Behavioral Economy, the psychology of market and economy runs in different directions. While there are factors that contribute in the development of both, the growth of market also depends upon the global developments such as central bank balance sheet expansion, falling rates and easy money availability and global fund flows.  As the global economy is lowered by amidst Covid-19 all these variables have been debilitated. With previously failed strategy, no backup and poor management of this consolidation scheme, the share market cannot be expected to improve the GDP and hence, the basis of this amalgamation will fall apart.

 

 

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[1]Department of Financial Services, Merger of Public Sector Banks (2020),

https://financialservices.gov.in/recent-updates/merger-public-sector-banks.

 

[2] Quill, James H., “Profit Sharing - A Means of Economic Cooperation between Labor, Management, And Government” (1954). Loyala University Chicago. 1219. https://ecommons.luc.edu/luc_theses/1219

[3] Ministry of Finance, Measures to Achieve Higher Economic Growth (2019),

https://financialservices.gov.in/sites/default/files/Final%20Presentation%2030.8.2019%20FM%27s%20Conference.pdf.

[4]Punjab National Bank, Salient Features of Policy for Engagement of Recover Agencies (2019),

https://www.pnbindia.in/downloadprocess.aspx?fid=L27hh4gp9MxDKnPItVBhvw==

[5]View: Opportunity in the time of crisis, The Economic Times (2020)

https://economictimes.indiatimes.com/news/economy/finance/view-opportunity-in-the-time-of-crisis/articleshow/75105822.cms.