Bank consolidation: 5 mergers from the past
Mumbai: This is not the first time that the idea of merging state-owned banks has gained momentum. In his path-breaking 1991 report on banking sector reforms, M. Narasimham, a former Reserve Bank of India governor, had recommended mergers to form a three-tier structure with three large banks with international presence at the top, eight to 10 national banks at tier two, and a large number of regional and local banks at the bottom. Later, the P.J. Nayak Committee had also suggested that state-run banks should either be merged or privatized. Indeed, according to Indian Banking Association data, there have been at least 49 mergers since 1985. Here’s a quick look at five of them:
SBI merger with associate banks and Bharatiya Mahila Bank (2017)
As the largest lender, State Bank of India was already designated a systemically important institution. It just became bigger this April after swallowing five associates and the Bharatiya Mahila Bank. The merger helped SBI gain a spot among the top 50 banks globally. However, as the June quarter results how, bad loans have now climbed to almost one-tenth of its loan book. The overall picture of the impact of merger will become clearer in the coming quarters.
State Bank of India and State Bank of Saurashtra (2008)
This was the first of the seven mergers between SBI and its associate banks. After the banking sector was opened to foreign banks in 2009, consolidation of SBI with associates was actively considered in order to increase its competency vis-à-vis entry of foreign banks.
Bank of Saurashtra was chosen first as it was fully owned by SBI, was smaller than other associates and it would enhance SBI’s limited presence in Saurashtra region.
Oriental Bank of Commerce (OBC) and Global Trust Bank (2004)
This one was a shotgun merger like many bank mergers have been in India. It was proposed in order to protect the interests of the depositors of GTB. The bank had suffered massive losses and its net worth wiped off. The merger allowed OBC, a public sector bank to expand in south India and gain a million depositors. However, profits took some beating and capital adequacy fell on account on higher provisioning for non-performing assets.
Bank of Baroda (BoB) and Benares State Bank Ltd (2002)
This was another bailout in the form of a merger. BoB bailed out the Uttar Pradesh-based private sector lender which had been incurring losses. A 20 October 2001 Business Standard report said the government was in favour of liquidating the insolvent banks, however, the merger was initiated keeping in mind upcoming state elections in Uttar Pradesh. BoB gained 105 branches and a small customer base. The deal did not bring any significant benefits to the public sector lender.
Punjab National Bank (PNB) and New Bank of India (NBI) (1993-1994)
This was the first ever merger between two nationalized banks. NBI, nationalized in 1980, was loss making and its capital and deposits had eroded. The bank had a loan book of close to Rs1,000 crore compared to PNB’s Rs12,000 crore. Also, this was a case of a stronger bank protecting a weaker one.
As a result of this merger, some employees of NBI were found surplus who were shifted to various PNB branches. These transfers were challenged by the All India New Bank of India Employees Federation and NBI Employees Union in the Allahabad high court.