MERGER OF INDIAN BANKING 2019

The Finance Minister has announced the biggest consolidation plan of Public sector Banks (PSBs)- merging 10 of them into just 4.

New Banks After the Merger

Sr. No.	Amalgamated Banks	Anchor Banks
1	Punjab National Bank (PNB), Oriental Bank of Commerce (OBC), and United Bank of India	PNB
2	Canara Bank and Syndicate Bank	Canara Bank
3	Union Bank of India, Andhra Bank, and Corporation Bank	Union Bank of India
4	Indian Bank and Allahabad Bank	Indian Bank

• Now, the total number of PSBs after consolidation has come down to 12 from 27 in 2017. The earlier mergers were:
  • Vijaya Bank and Dena Bank with Bank of Baroda (BoB) – effective from April 01, 2019.
  • State Bank of India absorbed five of its associates and the Bharatiya Mahila Bank in 2017.

Current Scenario of PSBs

• After entire merger exercises, the next-generation PSBs of India can now be ranked according to their business size, as follows:

Sr. No.	Bank Name	PSB Rank by size
1	State Bank of India	Largest
2	Punjab National Bank	2nd largest
3	Bank of Baroda	3rd largest
4	Canara Bank	4th largest
5	Union Bank of India	5th largest
6	Bank of India	6th largest
7	Indian Bank	7th largest
8	Central Bank of India	8th largest
9	Indian Overseas Bank	9th largest
10	UCO Bank	10th largest
11	Bank of Maharashtra	11th largest
12	Punjab & Sind Bank	12th largest

Benefits of Merger

• Competetive: The consolidation of PSBs helps in strengthening its presence globally, nationally and regionally.
• Capital and Governance: The government’s intention is not just to give capital but also give good governance. Hence, post-consolidation, boards will be given the flexibility to introduce the chief general manager level as per business needs. They will also recruit chief risk officer at market-linked compensation to attract the best talent.
• Efficiency: It has the potential to reduce operational costs due to the presence of shared overlapping networks. And this enhanced operational efficiency will reduce the lending costs of the banks.
• Technological Synergy: All merged banks in a particular bucket share common Core Banking Solutions (CBS) platform synergizing them technologically.

Core Banking Solutions

• Core Banking Solutions (CBS) can be defined as a solution that enables banks to offer a multitude of customer-centric services on a 24×7 basis from a single location, supporting retail as well as corporate banking activities.
• The centralisation thus makes a “one-stop” shop for financial services a reality. Using CBS, customers can access their accounts from any branch, anywhere, irrespective of where they have physically opened their accounts. The customer is no more the customer of a Branch. He becomes the Bank’s Customer.

• Self-Sufficiency: Larger banks have a better ability to raise resources from the market rather than relying on State exchequer.
• Recovery: The loan tracking mechanism in PSU banks is being improved for the benefit of customers.
• Monitoring: With the number of PSBs coming down after the process of merger – capital allocation, performance milestones, and monitoring would become easier for the government.

Challenges

• Decision Making: The banks that are getting merged are expected to see a slowdown in decision making at the top level as senior officials of such banks would put all the decisions on the back-burner and it will lead to a drop in credit delivery in the system.
• Geographical Synergy: During the process of merger, the geographical synergy between the merged banks is somewhat missing. In three of the four merger cases, the merged banks serve only one specific region of the country.
  
  • However, the merger of Allahabad Bank (having a presence in East & North region) with the Indian Bank (having a presence in South) increases its geographical spread.
• Slowdown in Economy: The move is a good one but the timings are not just apt. There is already a slowdown in the economy, and private consumption and investments are on a declining trend. Hence, there is a need to lift the economy and increase the credit flow in the short-term, & this decision will block that credit in the short-term.
• Weak Banks: A complex merger with a weaker and under-capitalized PSB would stall the bank’s recovery efforts as the weaknesses of one bank may get transferred and the merged entity may become weak

History of banking in in india :

he banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969

Phase II: The Nationalisation Phase which lasted from 1969 to 1991

Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and continues to flourish till date

Given below is a pictorial representation of the evolution of the Indian banking system over the years:

Candidates can get details about the functions of Banks at the linked article.

Further below in this article, we shall discuss the different phases of Bank industry evolution.

Pre Independence Period (1786-1947)

The first bank of India was the “Bank of Hindustan”, established in 1770 and located in the then Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832. 

During the Pre Independence period over 600 banks had been registered in the country, but only a few managed to survive.

Following the path of Bank of Hindustan, various other banks were established in India. They were:

• The General Bank of India (1786-1791)
• Oudh Commercial Bank (1881-1958)
• Bank of Bengal (1809)      
• Bank of Bombay (1840)    
• Bank of Madras (1843)   

During the British rule in India, The East India Company had established three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were later merged into one single bank in 1921, which was called the “Imperial Bank of India.”

The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is currently the largest Public sector Bank. 

Given below is a list of other banks which were established during the Pre-Independence period:

Pre-Indepence Banks in India
Bank Name	Year of Establishment
Allahabad Bank	1865
Punjab National Bank	1894
Bank of India	1906
Central Bank of India	1911
Canara Bank	1906
Bank of Baroda	1908

If we talk of the reasons as to why many major banks failed to survive during the pre-independence period, the following conclusions can be drawn:

• Indian account holders had become fraud-prone
• Lack of machines and technology
• Human errors & time-consuming
• Fewer facilities
• Lack of proper management skills

Following the Pre-Independence period was the post-independence period, which observed some significant changes in the banking industry scenario and has till date developed a lot.

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led privately which was a cause of concern as the people belonging to rural areas were still dependent on money lenders for financial assistance.

With an aim to solve this problem, the then Government decided to nationalise the Banks. These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised in 1949.

Candidates can check the list of Banking sector reforms and Acts at the linked article.

Following it was the formation of State Bank of India in 1955 and the other 14 banks were nationalised between the time duration of 1969 to 1991. These were the banks whose national deposits were more than 50 crores.

Given below is the list of these 14 Banks nationalised in 1969:

1. Allahabad Bank               
2. Bank of India                          
3. Bank of Baroda
4. Bank of Maharashtra         
5. Central Bank of India
6. Canara Bank         
7. Dena Bank
8. Indian Overseas Bank
9. Indian Bank
10. Punjab National Bank                         
11. Syndicate Bank             
12. Union Bank of India
13. United Bank 
14. UCO Bank

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks included:

1. Andhra Bank
2. Corporation Bank
3. New Bank of India
4. Oriental Bank of Comm.
5. Punjab & Sind Bank
6. Vijaya Bank 

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalised in 1959:

1. State Bank of Patiala 
2. State Bank of Hyderabad 
3. State Bank of Bikaner & Jaipur 
4. State Bank of Mysore 
5. State Bank of Travancore 
6. State Bank of Saurashtra 
7. State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.

Impact of Nationalisation

There were various reasons why the Government chose to nationalise the banks. Given below is the impact of Nationalising Banks in India:

• This lead to an increase in funds and thereby increasing the economic condition of the country
• Increased efficiency
• Helped in boosting the rural and agricultural sector of the country
• It opened up a major employment opportunity for the people
• The Government used profit gained by Banks for the betterment of the people
• The competition decreased, which resulted in increased work efficiency 

This post Independence phase was the one that led to major developments in the banking sector of India and also in the evolution of the banking sector. 

Liberalisation Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and regulations need to be followed to continue the profits provided by the banking sector. The last phase or the ongoing phase of the banking sector development plays a hugely significant role.

To provide stability and profitability to the Nationalised Public sector Banks, the Government decided to set up a committee under the leadership of Shri. M Narasimham to manage the various reforms in the Indian banking industry.

The biggest development was the introduction of Private sector banks in India. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included:

1. Global Trust Bank
2. ICICI Bank
3. HDFC Bank
4. Axis Bank
5. Bank of Punjab
6. IndusInd Bank
7. Centurion Bank
8. IDBI Bank
9. Times Bank
10. Development Credit Bank

The other measures taken include:

• Setting up of branches of the various Foreign Banks in India
• No more nationalisation of Banks could be done
• The committee announced that RBI and Government would treat both public and private sector banks equally
• Any Foreign Bank could start joint ventures with Indian Banks
• Payments banks were introduced with the development in the field of banking and technology
• Small Finance Banks were allowed to set their branches across India
• A major part of Indian banking moved online with internet banking and apps available for fund transfer

Thus, the history of banking in India shows that with time and the needs of people, major developments have been brought about in the banking sector with an aim to prosper it.