Mergers to strengthen India’s banking sector

In the recent years, as part of the Government's banking reforms agenda, the focus has been on consolidation and streamlining of the 21 PSBs, many of which have been facing operational and income challenges

January 9, 2019

Government is confident that consolidation in banking and financial services sector will help create strong, globally competitive entities with economies of scale

With its merger, SBI has become one of the top 50 global banks, with an operation that includes 24,017 branches and 59,263 ATMs and customer base of 420 million

The merged Bank of Baroda group will control more than 34 per cent of low-cost deposits, a capital buffer of nearly 12 per cent and a business book of US$208 billion

Acquisition of IDBI Bank by Life Insurance Corp is at an advanced stage, with LIC acquiring 51 per cent controlling stake and making an open offer for additional 26 per cent

In the context of economic liberalisation both within India as well as globally, the Indian banking sector has been going through a phase of reforms aimed at improving the operational efficiency and upgrading to international standards of performance. One of the key features of Indian banking is the dominance of state owned public sector banks (PSBs) accounting for nearly 80 per cent  of the industry. However, with 21 different entities competing against each other, the potential advantages of a near state monopoly have been largely neutralised. The banking sectors reform process was set in motion in 1991 with the Narsimhan Committee making several recommendations for healthy development of the sector. In the recent years, as part of the Government’s banking reforms agenda, the focus has been on consolidation and streamlining of the 21 PSBs, many of which have been facing operational and income challenges.

Biggest merger in Indian banking sector

The most recent and the largest merger in the history of Indian banking was that of State Bank of India (SBI) combining with its five associate banks namely – State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore, along with Bharatiya Mahila Bank, with effect from April 2017. With this merger, SBI entered into the league of top 50 global banks, with an operation that includes 24,017 branches and 59,263 ATMs and a total customer base of 420 million. The bank’s asset book of more than US$520.4 billion – five times larger than India’s second largest bank. While on one hand, the larger institution is now better equipped to channelise fresh credit outflows to productive sectors, on the other hand, for the Central Government, as the principal shareholder, there are six less capital-hungry banks to support.

This is not the first time that SBI has merged with other banks. In 2008, State Bank of Saurashtra was merged with SBI, followed by the merger of State Bank of Indore in 2010. In fact, SBI itself came into existence when Bank of Bengal, Bank of Madras and Bank of Bombay amalgamated to form the Imperial Bank of India in 1921 which was subsequently converted to State Bank of India in 1955. Like in any other restructuring exercise of this magnitude, the merger of associate banks with SBI had its share of apprehensions relating to asset quality and profitability of the merged entity, as well as transition issues relating to harmonisation of technology, human resource reallocation and rationalisation of branches, among others. These apprehensions will be best addressed with operational improvements.

The latest merger has helped SBI in driving synergies, reducing duplication and optimization of resources in terms of reduction in number of branches by 1,805, rationalisation of 244 administrative offices as well as 2.3 per cent reduction in staff expenses, among other benefits. The Chairman of State Bank of India, in his message to shareholders stated that “…the whole (merger) process went through seamlessly, with no hiccups either on the technology front or the HR front… and we are now reaping the synergies of merger on multiple fronts.” The merger is likely to lead to savings of more than US$140 million annually, and by 2020, the bank targets a credit growth of 10-12 per cent. Meanwhile, the resolution of stressed assets is progressing ‘satisfactorily’, though the positive outcome will take some more time to reflect in the profit and loss account.

The insurance sector has also taken a cue from this with Government-controlled non-life insurance companies – National Insurance, United India Insurance and Oriental Insurance going ahead with their merger

Second round of mega consolidation

Encouraged by the success of SBI’s merger, the Government is now going ahead with another mega merger of three nationalised banks – Bank of Baroda (BoB), Vijaya Bank and Dena Bank, as proposed in September 2018 by the Alternative Mechanism Panel set up by the Central Government to fast-track consolidation among PSBs, headed by Finance Minister Arun Jaitley. The process was in fact set in motion in June 2018, with SBI Chairman making a presentation to bankers sharing experiences on the merger of SBI with five associate banks.

With the boards of the three banks having already approved the consolidation proposal, in January 2019 the nation’s Cabinet Committee on Economic Affairs (CCEA) approved what will become the first-ever three-way merger in the country’s banking sector. The merged entity will become the second largest PSB in the country, after SBI, and the third largest bank overall. The merged entity will have a strong presence across the nation with more than 34 per cent of low-cost deposits, a capital buffer of nearly 12 per cent and a business book of US$208 billion. The merger will come into force on April 1, 2019. Considering that each of the three banks enjoy strong brand equity, post merger the names of Vijaya Bank and Dena Bank will be retained, and the two banks will operate under the umbrella the Bank of Baroda group.

Unlike the first mega merger of associate banks with SBI, the amalgamation of BoB, Vijaya Bank and Dena Bank brings together three entities with varied business portfolio (Dena Bank is skewed towards MSMEs, while Vijaya Bank and BOB’s are relatively broad based with BoB having higher retail exposure and a pan-India presence) and organisational structure (BoB has a 3-tier structure – regional offices, zonal offices and head office, while the other two have a 2-tier structure with zonal and head offices). A Central Steering Committee comprising of CEOs and Executive Directors of the three banks has been formed to oversee the transition, supported by 14 functional groups, comprising of general managers.

Future of consolidation in financial services

In addition to the above mega mergers, the acquisition of IDBI Bank by Life Insurance Corp (LIC) is at an advanced stage, with LIC acquiring 51 per cent controlling stake and also making an open offer for additional 26 per cent shares in December 2018.

The insurance sector has also taken a cue from this with Government-controlled non-life insurance companies – National Insurance, United India Insurance and Oriental Insurance going ahead with their merger, likely to be completed by March 31, 2019. The combined entity would be the largest non-life insurance company in India, valued at up to US$21 billion, with 32 per cent market share, benefitting from combined resources of over 100,000 agents, 45 million policyholders and 6,000 branches.

Although further rounds of consolidation of PSBs is not on the cards, Finance Ministry officials have indicated that the reform process will continue, with the Government looking to gradually reduce its stake in PSBs to 52 per cent, and also focus on consolidation of regional rural banks from 56 to 38. The Government is confident that the consolidation in banking and financial services sector will help create strong, globally competitive entities with economies of scale, and will enable realisation of wide-ranging synergies. This will ultimately benefit consumers through enhanced access to banking and other services.

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