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  • Category: Government

    What are the benefits of merger of banks in India?

    Have a query about the banks merger done by the government? Searching for the reasons online? Check out this page for advice from experts.

    Recently, Government of India has merged the associate banks of SBI with State Bank of India. Now, the Government has expressed its intention to merge most of the public sector banks into some 4 to 5 strong banks. But it does not talk about the merger of small banks in the private sector. It keeps on giving permission to new smaller banks in the private sector. In this context, what will be the benefits of merger of banks only in the public sector but not in the private sector?
  • Answers

    3 Answers found.
  • Merger of banks is thought of n two contexts mainly.
    1. For sufficient capital base and make the banks as large entities .
    2.To avoid unhealthy and overlapping competition.

    Nowadays there are various stipulations like capital Adequacy Ratio etc for the safety and stability of banks. Hence large amount of capital is needed. For public sector banks, the capital needed is pumped in by the central government. By merger of a few public sector banks their capital increases and the merged single entity gets a broader capital base which it can use for widening and up scaling its operations and geographic expansions. The bank also gets large asset consolidation by merger. The other alternative is privatising whch may not be preferable and feasible.

    Being public sector banks, all of them are under same controls and legal and statutory environments. So branches of many public sector banks operating in the same area will only add to unhealthy overlapping. The same will add to the unavailability. In merging the nonviable branches can be closed and the merged entity can have one or two branches which will serve large clientele and will be better viable.

    A larger entity with larger capital base and need based branches and centres can take up expansion and take up competition from international banks also. Less number of entities will also help better and easy monitoring and fast response by control mechanisms.

  • Main reasons are increasing the capital base and reduce redundancy after merger. There were different levels of NPA issues in the different banks and after merger these can be tackled at a higher level in order to materialize them in a time bound way.

    The inequality in staff pattern and population can also be addressed in a unified way.

    Knowledge is power.

  • Merger of regional banks to become a large entity is a good sign for growth of Indian banking system. Smaller banks have less capital base and limited costumers as well because the interest rates on their saving bank accounts, fixed deposit schemes are low and interest rates on loans offered by them are quite high.

    Talking on merger of associate banks of SBI, chairman of SBI Arundathi Battacharya says that "Borrowers of these associate banks will feel the direct benefit of lower interest rates". Banks that have a higher capital base will usually tend to lower their interest rates on their loan schemes which are direct benefit to customers. The merger of several banks into one entity will make a huge capital base and also standardization of policies among these banks that helps in increased transparency of services to its customers.

    The cost of funds of the merged bank will tend to be low, which directly transforms to less interest rate on several loan schemes of merged bank when compared to smaller banks. The merger bank will be so huge in business that customers will feel secured and increase the trust on the bank services.

    Venkat Satish Mamidisetti,
    Power Plant Operations Engineer.

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