Bank mergers to help India get closer to $5 trillion economy dream

The bank merger is expected to benefit various stakeholders. The mergers may help the banks by scaling up quickly and get a large number of new customers. This will help the banks with more capital to lend and invest. This will also increase their geographical footprint across the country and internationally. Small banks can also increase their efficiency to international standards. Banks which can only dream of Basel III standards can now make it practical and approachable. Merger can help in offering more products and better service to the customers. Consolidation of the banking sector will also reduce the unhealthy competition prevalent between the banks now. This is also beneficial to the bank staff as it will increase their bargaining strength for better wages. Banking technology will also improve once the mergers happen.

But this merger comes with its own cost. A few mergers take into consideration only the banks. It fails to consider the people or the employees involved in such mergers. Many employees lose their promotions, some lose their seniority. They are sometimes forced to report to much junior professionals. This leads to discontentment and ultimately employee dissatisfaction and demotivation. Though the merger did happen on the books, the merger ultimately fails.

The merger sometimes may lead to closure of branches in the same area. This will lead to employee relocation or even job losses or voluntary retirement schemes. This may ultimately create unemployment situation and law and order problems or social disturbances. Each bank functions with its own processes and cultures. Mergers will lead to conflict of such processes and cultures. Much of the senior management’s time will be devoted to addressing such conflicts than the growth of the bank.

The merger has not come as a surprise. The various committees set up earlier for banking reforms had also suggested mergers. These committees include Narasimham committee (1991 and 1998) and Khan committee in 1997. The Reserve Bank of India had set up a Verma committee in 1999 to identify and examine the problems of weak banks and their restructuring. The Verma panel had also suggested bank merger as a step for financial restructuring among the weak banks. It was only a matter of time before the government stepped in to consolidate the banking structure. The strong Modi government made it happen.

In fact, one of the reasons for the success of SBI was its size. The bigger bank helps in more independent decision making. They don’t have to be dependent on the central government. Mergers will also lead to less bureaucracy and faster decision making. The banks have to take advantage of synergy and should not clone itself to one of the merging banks. It should take advantage of large-scale operations. It is a good beginning and a good strategy to strengthen the financial base of the economy to get into the $5 trillion economy in the next five years.