Question

• Banks are merging and creating larger and larger entities. Will bank mergers necessarily reduce competition? Should the government act to prevent more bank mergers from occurring? Think about mergers that give a bank a greater market share within an area versus mergers that expand a bank’s geographic reach.

Answer 1

Nearly every middle-market bank in the industry is looking to either acquire another bank or be acquired, and it’s likely that yours is no exception. Many banks see an acquisition or merger as a chance to expand their reach or scale up operations quicker. Yet, a bank acquisition is not without its drawbacks as well – particularly for the unprepared banking executive.

Benefits Of Bank Mergers And Acquisitions

1. Reduced the cost of operation

2.Helps in financial inclusion and broadening the geographical reach of the banking operation

3. NPA and risk management are benefited

4. Merger leads to availability of a bigger scale of expertise and that helps in minimising the scope of inefficiency which is more in small banks

5. The disparity in wages for bank staff members will get reduced. Service conditions get uniform

6. Merger sees a bigger capital base and higher liquidity and that reduces the government's burden of recapitalising the public sector banks time and again. After these mergers the lending capacity of the Public Sector Banks will increase and their balance sheet would also be strong.

7. Redundant posts and designations can be abolished which will lead to financial savings

8. These big banks would also be able to compete globally and increase their operational efficiency by reducing their cost of lending.

Dangers Of Bank Mergers And Acquisitions

1. Many banks have a regional audience to cater to and merger destroys the idea of decentralisation.

2. Larger banks might be more vulnerable to global economic crises while the smaller ones can survive

3. Merger sees the stronger banks coming under pressure because of the weaker banks.

4. Merger could only give a temporary relief but not real remedies to problems like bad loans and bad governance in public sector banks

5. Coping with staffers' disappointment could be another challenge for the governing board of the new bank. This could lead to employment issues.

Goverment should closely monitor how well the merger is planned and executed. It should intervene only in case of any complications in any merger or if it forsees any negative economic impact in the future due to that merger.

Impact of bank mergers- Increase in geographic reach & market share

The amalgamated entities will, as a result, have strong regional presence even as their cost of operations would reduce on the back of branch rationalisations due to overlaps.

When banks merge, they will be able to take the advantage of economies of scale along with increased market share that comes with both the banks.