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Will consolidating 27 PSBs into 12 truly 'unlock potential'?

At the outset, the overall impact of these mergers on the banking sector would be positive.

October 25, 2019 / 04:55 PM IST
Representative image

Representative image

Prem Rajani

The Finance Minister, recently announced the consolidation of a few public sector banks, to be precise ten banks to merge into four banks. The ultimate (surviving) banks will be Indian Bank, PNB, Union Bank and Canara Bank. This is the next round of consolidation of public sector banks after the merger of State Bank Group into State Bank of India.

Naturally, any merger (and at times, demerger) of large organizations, in particular of public sector undertakings, invite public opinion, usually criticism.

At the outset, the overall impact of these mergers on the banking sector would be positive. With the consolidation, the merged entities (the amalgamated / the surviving bank) will be more robust than the two to three merging banks (as they stand today) would be individual. There may be few lay-offs at all levels (right from the Board levels to operational levels); though apparently, no such lay-offs had taken place that when State Bank Group merged with the State Bank of India.

There is a possibility that the merging banks having branch offices in the same vicinity (usually identify by Pincode) may consolidate their branches into one single branch and close the other branches in the vicinity. From the customers' point of view, we doubt there will be any inconvenience to any customer since their multiple accounts (in the same name) may be consolidated as one account in the merged bank and, to that extent, they may have to suitably update various records.

If a person has an account in three banks, which are now merging into one bank, chances are that the constituent will now have only one account in the merged bank, unless he chooses to open few more accounts on the different category (savings, current) or jointly with his other family members. Of course, the person can open bank accounts in other banks as well. Likewise, the depositors and borrowers from these merging banks will have to pass necessary entries in their books reflecting the name of the merged bank. However, legally every depositor and borrower will enjoy the benefit (and be bound by the same burden) as he may be entitled (or subject) to earlier. For instance, if a merging bank issued a TDS Certificates in Q1 and the merged bank issues a TDS Certificates in Q4 for the same fixed deposit, the fixed deposit holder will be entitled to claim credit for all the TDS.

It does not appear that upon the proposed merger of the banks, there are any proposals to write-off or to provide any haircut to any depositor and to the extent it should be neutral to any stakeholders.

From a legal perspective, all these banks will have to comply with the standard regulatory process of obtaining shareholders' approval and the RBI permission. At the micro-level, each bank may have to undergo various compliances and reauthorizations at an international level, but this is common in any integration, be it banks, corporates or even private companies.

Most of the laws, whether direct tax, indirect tax, corporate laws, and labour laws, adequately recognize amalgamation and contain provision for seamless transfer of contracts, tax credit and employees to the merged entity, (including, carry forward of losses, if any), uninterrupted services of the employees, continuation of various licenses and lease of branches and such other micro-level issues, including, credit of the employees to the provident fund, gratuity fund, etc. and consolidation of accounts.

With a wider footprint, whether in number of branches or various services that the merged bank could offer to the customers, the merged bank will certainly enjoy economy of scale and perhaps with closure of few duplicate branches and services (such as expensive IT services, which was earlier availed by two to three banks, will not be availed by only one bank) and these will hopefully save duplicate expenses, thereby improving the bottom line of the banks. The moment a bank becomes stronger, it repossesses customer confidence and gives the banks better negotiation power, ability to extend large loans, with enough manpower to monitor the disbursement utilization and recovery of such large loans. All in all, reposing customer confidence.

As law firms, whenever a transaction requires placing some funds in escrow mechanism, quite often but not, most conservative attorneys suggest placing the funds in the State Bank of India. Though people do place escrow funds in various with banks also. If the merger of certain banks creates large banks equal into the size of State Bank instil customer confidence, senior citizens will prefer to keep their lifetime savings in fixed deposits and large corporates may park their temporary surplus funds (or escrow funds) with these large banks.

During the last few years, we have seen the amalgamation of State Bank Groups into State Bank of India and of Dena Bank and Vijaya Bank with Bank of Baroda. None of these mergers have affected the banking sector, the industry or any customer confidence. In my view, each of these consolidations has been successful to date.

Lastly, these consolidated merged banks will be a better position to negotiate and establish overseas branches making Indian banks truly international.

The author is the Founder and Managing Partner, Rajani Associates.

Moneycontrol Contributor
Moneycontrol Contributor
first published: Oct 25, 2019 04:55 pm