Mergers in the Banking Sector – The Advantages it Ensues

Last Updated at: October 22, 2019
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Mergers in the Banking Sector – The Advantages it Ensues

In the last year, several mergers took place in the banking industry. For instance, the largest public sector bank, State Bank of India acquired six regional banks in the year 2017. Last week, one of the biggest mergers in the banking space took place – the merger of three middle-level banks – Bank of Baroda with Dena bank and Vijaya Bank, which is likely to create India’s third-largest bank. We know that the banking sector is often known as the backbone of the Indian economy. In this post, we cast light on why mergers typically take place in the banking industry and how it can have several positive advantages for customers.

Merging of a loss-making bank with a profitable bank
A merger of a loss-making bank is seen as a key revival strategy. RBI norms often prohibit fresh lending for a bank with substantially large non-performing assets. These are the loans on which no payments on either the interest or principal component can be expected. When such small and weak banks are larger in number, regulatory oversight of the government and banking authorities becomes difficult. Such banks also find it difficult to sustain and cover for operational costs. A merger with a successful bank helps pump in the necessary capital required for servicing existing obligations of the weak bank, and the profitable bank also earns in the process – due to the addition of customers, resource base, employees and get access to units in unexplored areas.

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How such mergers affect customers

Access to better facilities

Since the banking sector is very competitive, with almost all banks offering similar deposit and lending services, the key distinguishing element is often the add-on services such as priority lending, access to facilities at home, high rates of interest and flexibility on fixed deposits etc. A merger of two banks helps the customers of both banks access more services and benefit from a larger bouquet of offerings.

Benefit to investors

Any news of a merger has a specific impact on its stock indices. For example, after the news of the merger of Vijaya Bank and Dena bank was made public, Dena Bank’s stock gained almost 20 percent, while Vijaya Bank’s stock witnessed a one percent increase, both of which had been seeing a bearish trend in the past. Thus, mergers also benefit the investors and stock owners. It also gives the hope of a higher rate of return on investment in the future.

Economies of scale & reduced transaction costs

A Merger of two banks makes it possible to reap the advantages of economies of scale. Since the resource and asset base is combined, the merged entity finds it easier to target new customers and offer better and customized services, owing to its large base of finances. The administrative and operating expenses also reduce, since the same costs are now spread over a large number of customers.

Consolidation in the Indian Banking Sector

Many economists believe that instead of having many levels of banks present in India, there should be few consolidated large banks having a presence in multiple cities and rural areas. This makes not just access to banking facilities easier but makes monitoring efficient as management is controlled, thereby reducing chances of failure in the banking industry.

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Mergers in the Banking Sector – The Advantages it Ensues

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In the last year, several mergers took place in the banking industry. For instance, the largest public sector bank, State Bank of India acquired six regional banks in the year 2017. Last week, one of the biggest mergers in the banking space took place – the merger of three middle-level banks – Bank of Baroda with Dena bank and Vijaya Bank, which is likely to create India’s third-largest bank. We know that the banking sector is often known as the backbone of the Indian economy. In this post, we cast light on why mergers typically take place in the banking industry and how it can have several positive advantages for customers.

Merging of a loss-making bank with a profitable bank
A merger of a loss-making bank is seen as a key revival strategy. RBI norms often prohibit fresh lending for a bank with substantially large non-performing assets. These are the loans on which no payments on either the interest or principal component can be expected. When such small and weak banks are larger in number, regulatory oversight of the government and banking authorities becomes difficult. Such banks also find it difficult to sustain and cover for operational costs. A merger with a successful bank helps pump in the necessary capital required for servicing existing obligations of the weak bank, and the profitable bank also earns in the process – due to the addition of customers, resource base, employees and get access to units in unexplored areas.

Talk to Legal Experts

How such mergers affect customers

Access to better facilities

Since the banking sector is very competitive, with almost all banks offering similar deposit and lending services, the key distinguishing element is often the add-on services such as priority lending, access to facilities at home, high rates of interest and flexibility on fixed deposits etc. A merger of two banks helps the customers of both banks access more services and benefit from a larger bouquet of offerings.

Benefit to investors

Any news of a merger has a specific impact on its stock indices. For example, after the news of the merger of Vijaya Bank and Dena bank was made public, Dena Bank’s stock gained almost 20 percent, while Vijaya Bank’s stock witnessed a one percent increase, both of which had been seeing a bearish trend in the past. Thus, mergers also benefit the investors and stock owners. It also gives the hope of a higher rate of return on investment in the future.

Economies of scale & reduced transaction costs

A Merger of two banks makes it possible to reap the advantages of economies of scale. Since the resource and asset base is combined, the merged entity finds it easier to target new customers and offer better and customized services, owing to its large base of finances. The administrative and operating expenses also reduce, since the same costs are now spread over a large number of customers.

Consolidation in the Indian Banking Sector

Many economists believe that instead of having many levels of banks present in India, there should be few consolidated large banks having a presence in multiple cities and rural areas. This makes not just access to banking facilities easier but makes monitoring efficient as management is controlled, thereby reducing chances of failure in the banking industry.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.