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Banks (History of mergers (27 years ago a Committee headed by
M…
Banks
In news
Alternative Mechanism headed by the
Union Finance Minister took the decision to amalgamate Bank of Baroda, Dena Bank and Vijaya Bank - to create India's 3rd largest bank
Fin min said: we can have 2 well performing banks absorb weak bank, which will be sustainable and will have higher lending ability
Dena bank is under PCA
Dena bank has highest NPA(11.04%), Lowest capital adequacy ratio(10.6%), only bank among three having negative return of assets
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History of mergers
27 years ago a Committee headed by
M.Narasimham first made a case for reducing the number of the Government
or State owned banks
That Committee was appointed in 1991
by Dr. Manmohan Singh,
It recommended restructuring to 4 banks, which could be projected as Global Banks and 8-10 national footprint/presence (than having dozen state owned banks)
Large number of Govt owned banks isnt a good strategy, because all get into same business and compete for same pie of customers==> Lower returns for govt
The Committee on Banking Sector Reforms
the second Narasimham Committee in 1998, also suggested mergers both in public and pvt sectors and even NBFCs
Since the beginning of the economic
reforms in 1990s, there have been 22 amalgamations, triggered by different circumstances
Merger
Procedure
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It is then submitted to the regulator and it
requires Parliament's approval and the merger process takes 9-12 months
Advantages
Overlap among banks in terms of branches, mode of operation and clients, Mergers can bring down cost through economies of scale
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Regional strenght: like Vijaya bank in South, Dena bank in Western India can collaborate into a bigger effort
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Concerns
The challenge is integration in a new
entity, the integration of workforce
Contrasting Human Resource
practices and aligning these with employee expectations or aspirations will also test new management
Without adressing bad loans problem, mere amalgamation wont solve any existent problem
Centre s Big Bang Bank Merger plan
has not been driven by complementaries, growth potential or
cost efficiency
It is compelled by weak state of the
small PSBs and the Centre's tight finances, which deter massive capital
infusion.