Question: Bank merging has been one of the most important reform undertaken by the government in recent times. Critically analyse the effects of this move.
Answer: The finance ministry had announced that 27 smaller nationalised banks will be merged to form 12 large banks and will create uniform financial institutions in the country. The move was necessary considering the economic situation of the country has been reeling under NPA’s and stressed assets.
The advantages of Bank mergers
- Reduction in operation cost
The merging of banks is expected to reduce operating costs of the banks upto a certain extent. The reduction in such costs is expected to help banks increase their profitability and generate revenues to boost the domestic economy.
- Balance stressed assets
Some banks have high liability whereas some have lower liability. The merging of such banks will help in boosting growth in banking sector by reducing stress to asset ratio.
- Acquisition of fresh talents
Some of the best talents that are working in smaller banks will be brought under the bigger organisation. This will help the banks to make use of new man power and grow their business.
- Impacts customers
Customers who are involved with a certain bank will hesitate to do business with the new entity due to trust issues. Long term effect of this move will erode profits of the banks and will make their growth difficult.
- Impacts business of pre- merger profitable bank
The bank which has been doing well before merging will see a loss in its credibility due to such act of merger. The market will instead opt for private banks fearing meltdown.
The merged entity may not be compatible with working with each other. There may be differences between the governing council decisions. This can impact growth of banks.
Thus, the move to merge banks can be considered a good one considering the long term effects but there are indications that banks may suffer on a short term due to loss of business. A systematic framework is needed to negate the short term losses.