As the stock market rebounds whenever there is a new beginning, so does the banking firm, after a merger. These bring hopes of a new wave of activity. The Indian banking system has undoubtedly made incredible leaps since its beginning and has spread its reach to the remotest corners of the country. The first banks in India were the Bank of Hindustan, which worked during the years 1770 to 1829 and the General Bank of India, which was established in 1786. The largest bank in the Indian history and the oldest of those still in existence, is the State Bank of India (SBI), which originated in the month of June in 1806. Back then, it originated in the Bank of Calcutta but soon became the Bank of Bengal. The first bank merger in India was witnessed in the year 1921, when the three presidency banks, the Bank of Bengal, the Bank of Madras and the Bank of Bombay, merged to form the Imperial Bank of India. After India gained independence and shook off the shackles of the British rule, the Imperial Bank of India evolved, in 1955, into the State bank of India.
Banking Awareness: Introduction to Bank Mergers
As financial intermediates, banks are known to play an important role in the economic growth. These provide the essential funds for investment purposes and also keep the capital costs low. The sector has transformed from a controlled to a liberalized system, over the years. Due to new technological changes that have occurred and been readily absorbed by the banking sector too, economies all across the globe have witnessed revolutionary changes in the same. Rising, positive domestic as well as global competition has also evoked a healthy spirit and scope for continuous improvement. Out of the various strategies developed for improvement, bank consolidation has worked out to be one of the best measures. Finally, of the different methods of consolidation, the most preferred is merger of banks.
Mergers and acquisitions are fast, as well as low on cost methods to improve the profit statements, in comparison to the scaling up of internal growth, according to Franz and H. Khan. Additionally, along with the increase in size, due to bank mergers, the efficiency of any system is also enhanced.
Literally, a merger refers to the combination of two or more corporate entities, into a single one, so as to enhance profits and cover up any loss incurred by the system or organization. Stock is the chief exchange medium for raising efficacy of the system, offered during the merger of two or more than two banks.
Types of Mergers witnessed in the Banking Sector
Merger of Banks is of different types. Based on the relation between the amalgamated entities, these may be classified into absorption, consolidation and acquisition.
- Absorption: It is the term used to define bank mergers, in which, one bank acquires the other bank completely. The bank which is acquired loses all control over its management and finances.
- Consolidation: Two or more banks may combine to form an entirely new functional bank. None loses complete control over management. In fact, the managerial role in the new bank is divided among the two. It is like fusing two objects together to make something entirely new yet single.
- Acquisition: It is the process of acquiring an effective control on the assets and management of a bank by another, without combination between the two banks.
The merger of two banks, on basis of the type of combining corporates, is termed as a Horizontal merger. This is the type of merger that happens between two corporate organizations that are engaged in similar work and with an attempt to achieve optimal profit efficiency.
Impacts of Bank Mergers
Mergers among banks and other corporate entities can have various impacts on the functioning of the system. Merging a small functional branch with a big one might enhance profit making. In the same case, output per employee is expected to increase and hence, working efficiency of the banking organization is enhanced manifold, as well as there is marked improvement in customer services offered by the firm. Also, the ratio of the assets which are non-performing or lacking in any spheres may be decreased. The ratio of debt recovery can be increased significantly. Owing to all such improvements, the overall profitability of the system is increased due to the adventure undertaken.
The following are some more of the effects a merger may have:
- Mergers and acquisitions enhance efficiency gains of the organizations by revenue increase as well as cost reduction. This helps add to profit systems and that in fact is the main motive of a merger among firms.
- Efficiency may also be improved; a number of folds if the acquiring bank is already working exceptionally well and additionally it brings up the efficiency of the target bank to the level it has attained over the span of time. This may be achieved by offering managerial expertise, working policies and experienced operations.
- Also in case of merger of few entities, diversity in investing assets related risks are also merged. The portfolio investment diversifies and increases the scope of growth.
- The diverse policies of the merging banks may be amalgamated or improved to increase profits. The customers are strongly attracted due to the variety of services which may come into play and also new benefits.
- Both domestic as well as global mergers help in diversifying the revenue sources for the firms and also apparently quite insignificant, yet not ignorable, profitability is observed.
- By linking related resources as well as assets owned by the merging banks, the greatest cost reductions and revenue synergies can be generated.
- Mergers might have only marginal effects on the economy and the local bank services.
The bigger, the better! Hence bank mergers are surely beneficial, especially, to the corporate consumers.