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‘A to Z’ BENEFITS OF BANK MERGERS

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A merger involves the total absorption of a target firm by acquiring.  As a result one firm ceases to exist and only the new firm(acquiring) remains.

General, the following are the advantages of the mergers:

  • Synergy: The synergy created by the merger of two companies is powerful enough to enhance business performance, financial gains, and overall shareholders value in long term.
  • Cost Efficiency: The merger results in improving the purchasing power of the company which helps in negotiating the bulk orders and leads to cost efficiency. The reduction in staff reduces the salary costs and increases the margins of the company. The increase in production volume causes the per unit production cost resulting in benefits from economies of scale.
  • Competitive Edge: The combined talent and resources of the new company helps it gain and maintain a competitive edge.
  • New Markets: The market reach is improved by the merger due to the diversification or the combination of two businesses. This results in better sales opportunities.

The above are a few advantages of Mergers.

Due to “Monopolistic Competition” prevailing in the market, every Business Organization is facing the following to vital challenges:

  • Increase in Competition and also Costs (Business Overheads)
  • Decrease in Product Price and thereby decrease in Spreads (Profits/Surplus)

In this scenario Mergers and Acquisitions gives some comfortable position to the Business Organizations to overcome the above problems.

Lot of discussions is happening among the Staff of Banking Industry and also in Public with regard to merger on the following NEWS:

‘Rationalization’ AND ‘Economies of Scale’ are the TWO biggest Advantages in the proposed merger, thereby huge Cost Reduction, Increase in Productivity Levels and it strengthens the Balance Sheet of acquiring Bank.A to Z ADVANTAGES OF MERGERS

BENEFITS IN “ADMINISTRATIVE COSTS”

  • Rationalization of Branches:

One of the Major Advantages of Merger of Banks is “Rationalization of Branches”.  From time to time Government of India / Reserve Bank of India instructed the Banks to open their Branches at different centres to provide service to the people in the country. The basic objective is to enjoy the fruits of the banking services by all sections of the society in India not by certain people of the country. But the actual situation is different “Bank Branches are flooded” in certain places / areas / towns and thin network of Branches in other places.  For example, in metros, urban areas the Bank Branches were located side by side and at certain places in the same building Four to Five Bank Branches were located.  On account of merger, rationalization of Branches is possible, thereby huge cost reduction to the acquiring Bank. Take for example, in Bank Street of Hyderabad for every 10 to 15 feet one Bank Branch. And in certain Commercial Complexes in Hyderabad City Four to Five Bank Branches of same group were located. Due to increase in alternate delivery channels like ATMs, POS Machines (Micro ATMs), Business Correspondents, Pass Book Printing machines, Internet Banking, Cash Deposit Machines etc. customers are gradually shifting from branch banking to alternate delivery channels thereby the footfalls of the Customers are gradually reducing particularly in Metros and Tier-I Cities. Due to merger, lot of scope for the acquiring bank for Rationalization of Branches at these centres, thereby it not only reduces huge amount of Overheads (Fixed and Variable Costs), Manpower Costs but also Productivity levels of the Bank will increase tremendously and optimum utilization of existing Branches or Branch licences is possible.

  • Rationalization of Regional / Zonal Offices:

For Administrative Control of Branches, banks have opened number of Regional / Zonal Offices across the Country.  All most all places the Administrative Offices (Regional / Zonal Offices) of Banks were located. Due to establishment of Regional Office or Zonal Offices at strategic cities huge amount of Administrative Cost is incurring by the Banks.  Once the merger happens, the Regional and Zonal Office will minimize drastically and the existing Regional / Zonal Offices can be used at optimum level,  thereby the following savings will arise to the acquiring bank.

  • High Rental Costs (Real Estate Costs)
  • Electricity Costs
  • Manpower Costs
  • Technology Costs
  • Overhead Costs etc.

Due to “Rationalization of Branches” on account of merger, number of Regional or Zonal Offices will also ‘come down drastically’ and effective use of the existing Regional or Zonal Offices of the acquiring Bank is possible. It not only reduces the administrative costs of the Bank, but also reduces wastages / duplication / underutilization by the acquiring bank.

  • Rationalization of Business Networks / Circle Offices:

To increase the volume of Business and also for to have a better control and follow up the Regional / Zonal Offices and Branches effectively and efficiently ‘business networks’ administrative offices were established by the Banks. These business networks of the Bank adds huge administrative costs like,

  • Higher Grade Officials to be posted to Head these Business Networks
  • Logistics Costs for the Officials
  • Additional Administrative Staff to support the officials of these Network Heads.
  • As these are located in Metros and Tier-I Cities it attracts huge Office Premises Rental Costs and other costs.

Due to availability of Information Technology, Video Conferences Systems, Emails, SMS, Quick Transportation Systems etc., these Business Networks can be centralized instead of in a distributed or decentralization manner. And due to rationalization of Branches and also Regional / Zonal Office Structures on account of Mergers, these Additional Business Networks / Circle Offices are not required and it will reduced drastically and thereby the acquiring bank will get huge savings in Fixed Costs, Overheads and also Manpower Costs. If any surplus of own Buildings of the Bank are vacant on account mergers, these buildings can be hired or sold by the Bank to get additional funds / revenues to the acquiring Bank Books.

  • Controlling the Real Estate Costs of CPCs:

Hiring of office premises in Prime Localities is a costly particularly in Metro and Tier-I Cities.  This not only it increases the Real Estate Cost of Hiring Premises (Fixed Costs) but also attracts other costs like infrastructure facilities like logistics, Information Technology, employing High Designation posts etc. These costs can be minimized by the acquiring bank particularly by merging the following Central Processing Centres (CPCs).

  • Retail Assets CPCs
  • SME CPCs
  • Liability CPCs
  • Asset Recovery CPCs
  • Clearing CPCs
  • Pension CPCs
  • CMP CPCs etc.

The above CPCs can be merged with the existing CPCs of the Bank and if existing CPCs or not sufficient due to volumes of business, it can be expanded further by paying additional rent to get more productive use benefit of existing CPCs instead of multiple CPCs functioning in the same City. Due to closer of multiple CPCs, huge amount of Fixed and Variable Costs can be minimized and it increases customer service of the acquiring bank. Better pricing of the bank products is also is possible due to reduction in Administrative Costs of the Bank in Marginal Interest Rates System of the acquiring Bank.

MANPOWER COST BENEFITS

  • Manpower Adjustments:

Manpower planning exercise is somewhat difficult function in the Banking Industry due to the following:

  • Transfers System
  • Promotions / Carrier Development.
  • Suddenly Increase or Decrease in Business Levels of the Branches due to economic conditions in the market.
  • Number of New Bank Branches other Banks added or closed in the market / area of operation.
  • Due to increase in Alternate Delivery Channels.
  • Due to adding of NBFCs, MFIs, Finance Companies etc.
  • Due to funding by Credit Card Agencies through EMI on purchases of consumer goods etc.
  • Due to saturation point reached Old Branches.
  • Due to closure of Industries on account of economic problems / viability.
  • Due to decrease in business levels in captive Branches (Universities, PSUs etc.)
  • Attrition rate in staff.
  • Sudden raise (spikes) in volumes (transactions / business) due to various factors and Government Policies etc.

On account of the above reasons, some of the Branches are running with excess staff and other branches are running with skeleton staff. Instant shifting or transfers or adjustment of staff is a problem, thereby interrupt in customer service and business levels of the bank. Immediate recruitment in place of promotions, attrition is not possible due to personnel policies of the Bank (Time lag between sourcing of application to joining will take a minimum of 6 months (i.e., total Recruitment processing time), most of banks are recruiting clerical or officers positions on Yearly Intervals). Due rationalization of Branches on account of merger, the acquiring bank will get surplus staff and this can be readjusted to needy branches without going for further recruitment, if more surplus personnel available, banks can offer voluntary retirement to staff. It not only reduces the manpower costs but also the needy branches will get adequate staff immediately to run the branches efficiently, thereby customer service will not interrupt and business levels will increase and  the end result is increase in productivity levels of acquiring bank.

  • Recruitment Costs:

This is more one important area where acquiring bank will be benefited on account of mergers, the acquiring bank can arrest the wastages in Recruitment Costs. Here, recruitment costs means, not only the cost of recruitment but also high Attrition Rate of new recruits at the initial stages of recruitment i.e.,

  • Training Costs including Initial Learning Curve Costs.
  • Decrease in Business Levels on account of resignations.
  • Interruption in Customer Service due to lack of staff at some branches and thereby of loss of Business.
  • Time Lag i.e., upto next recruitment, under utilization of Fixed Costs of the Bank Branches etc.,

For example SBI is conducting Manpower Recruitment TWICE in a year, one for State Bank of India and another for Associate Banks of SBI.  Due to difference in perks, promotion chances, location of Branches etc., those who joined in Associate Banks, after certain time, they will again appear for SBI and if they selected, they resigned from the Associate Banks of SBI.  Thereby the attrition rate is more in Associate Banks of SBI than in SBI.  Once merger happens, the acquiring Bank will conduct one examination, the above wastages / problems will not arise. Merger gives savings in Recruitment Costs of acquiring Bank.

Uniformity in Salaries & Allowances, Perks, Promotion Opportunities, Placements etc to Staff Members:

The reasons for attrition or shifting from Bank to another Bank due to the following reasons:

  • Due to difference in Salaries & Allowances
  • Due to difference Perquisites
  • Due to difference in Promotional opportunities or carrier development.
  • Due to place of posting
  • Work Culture etc.

Due to merger of different banks, acquiring will follow the Uniformity of the reasons mentioned above.  Thereby the following benefits will be gained by the acquiring bank i.e.

  • Decrease in staff attrition rate.
  • Increase in Productivity.
  • Increase in Staff involvement in work environment.
  • Easy to implement Standards or Bench marks.
  • Implementation of Productivity linked salaries is possible.

OVERHEAD COST BENEFITS

  • Minimization of Overheads Costs:

Other than the Interest Costs on Deposits and borrowed funds, the next major expenditure to the Banks is Manpower Costs and Overhead Costs.  The lateral two costs are on increasing trend in the Banking Industry.  The various overhead costs incurring by the Banks are:

  • Stationery and Printing.
  • Hiring of Premises Costs.
  • Travelling Expenses.
  • Hiring of Cars for Business Purpose.
  • Technology Costs particularly Hardware Costs and depreciation thereon.
  • Electricity Costs.
  • Annual Maintenance Costs (AMCs).
  • Advertisement Costs both printed and electronic media.
  • Depreciation on Fixed Assets.
  • Generator Hiring Costs etc.

Due to modernization of Branches, it increases the ambience cost of the Branches. In addition to this re-design, change in layout or re-location of the Branches is happening on frequent intervals for the Convenience of Customers and their comfort sake, thereby the overheads are on increasing trend.  Nearly 70% to 75% of the Branches are under Air-conditioned environment (including ATM Rooms, Kiosks etc.), Central Processing Centres (Retail Loans, SME Loans), Liability Central Processing Centres etc.,) thereby overheads of the Banks is on increasing trend. Once, merger happens, these costs will come down drastically in the acquiring bank due to rationalization of branches and also economies of scale. In most of the Branches incremental overhead cost is neither matching nor less than the incremental benefit from the Business.  If incremental cost is less than the incremental benefit then it is profitable to the bank through its banking operations. Definitely merger will gives some savings the acquiring bank in this regard.

Control on wastage of Advertisement Expenses:

Huge amount of advertisement Costs are incurred by the Banks for popularizing their Home Loans, Car Loans, Personnel Loans etc., Duplication and wastage is happening in Group entities of the Bank to sell the same product by different banks.  Same product with same features will be advertised by different entities. It is a wasteful exercise and less benefit the Group entity. Once merger happen common advertisement cost by the acquiring bank, thereby the wastages will be controlled and overheads (advertisement costs) decrease substantially.  All most all Group Banks are Tie-up with Car Dealers etc. to source the business from them and they are paying Higher Commission to them for sourcing low volume of business in a distributed manner.  Some of the group banks are using Direct Sale Agents for sourcing of Business for Car Loans, Housing Loans etc.  Due to merger and with higher volumes of the business of single entity, the cost of sourcing the business through these entities will come down drastically by modifying the “Service Level Agreements-SLAs” with Tie-up Agencies, which is beneficial to the acquiring Bank in Long run and also control these entities.

Large Scale Economies:

Merger leads to increase in Volumes of business and also Banking Operations.  Once volumes are increase, the acquiring bank will enjoy the benefits of “Large Scale Economies” in respect of the following costs:

  • Decrease in Overheads.
  • Decrease in Cash Replenishment Costs of ATMs.
  • Decrease in maintenance costs of Alternate delivery channels including Call Centres.
  • Decrease in Advertisement, Selling and Distribution Expenses.
  • Decrease in Information Technology Costs to a large extent.
  • Decrease in commission payable to business sourcing agencies.
  • Decrease in Rental Costs due merging of Big Branches and CPCs
  • Decrease in Stationery, Printing Expenses.

Benefits derived both in Fixed and Variable Costs to the acquiring Bank.  At the same time, the acquiring bank will incur additional costs for controlling of Branches or CPCs.  But if we see the incremental cost with incremental benefit, the incremental benefit is more than the cost.  Hence, the merger reduces the overall overhead costs of the acquiring bank.

FINANCIAL BENEFITS

  • NPA Management:

The side effects of increase in Non-performing Assets of the Banks are as follows:

  • It increases the Credit Risk.
  • It attracts more provisions.
  • It requires more Capital to fulfill the Capital Adequacy Ratio of the Bank.
  • It reduces the Bottom-line of the Bank.
  • It reduces the Credit Rating of the Bank.
  • It increases the Asset Liabilities Mismatches.
  • It increases Borrowings by the Treasury Department at High Cost to fulfill the ALM mismatches.
  • It decreases the Liquidity position of the Bank.
  • Due to high NPAs, the depositors will shift to other banks for safety of their savings.
  • It increases the attrition rate of the staff and sometime underutilization of staff etc.

To overcome the above problems, banks should minimize NPAs below the bench mark both in Gross and Net NPAs of the Bank.

NPA Management is BIG function in the Banking Operations. Every Bank has established NPA Management Departments, Sections at both Head office level, Zonal Office and Regional Office level.  In addition to the number of employees / officials are engaged in this function like:

  • DRT Cases and follow-up
  • SARFASI Cases follow-up
  • Issue of Notes under SARFASI
  • Court Cases and follow-up
  • Review of NPA Loans
  • Attachment of Primary and Collaterals
  • Debt Recovery Agents to recover Retail Loans
  • Soft Recovery Process by issue of notices, SMSs and Tele-calling etc.
  • Re-schedule / Re-phase of Loans
  • Corporate Debt Re-structuring
  • Call Centres to follow-up the NPAs
  • Emplaned Advocate for the Court, DRT Cases
  • Sale of Bad Loans to Asset Reconstruction Companies (ARCs) or Securitization.
  • Out sourcing agencies to attach and sale the properties etc.

Once, the merger happens, the acquiring bank will get huge savings by streamlining or rationalization of the above mentioned activities.  Better NPA management is possible in the merger process with strict control systems are to be established.

Better Asset Liabilities Management:

ALM is one of the important functions of the Bank, spreads / surplus, fine liquidity management of the bank is based on the better ALM practices.  Banks should maintain better ALM practices to avoid mismatches and also as per the regulatory guidelines. Due to ALM mismatches, liquidity as well as profitability issues will arise thereby short term borrowings at higher rate of interest affects the profitability of the Bank.  Penalties of Regulator will also increase in case of mismatches in Assets and Liabilities.  Balance Sheets of group entities in a distributed manner is difficult to control the ALM mismatches.  In case of mergers, acquiring bank will be benefited on account of better ALM practices and maintenance of fine Liquidity Management practices is possible, thereby it increases in profitability of acquiring Bank.  Better strategies can be implemented based on the volume and turnover of funds in acquiring Bank.  This facilitates to monitor or control by the Reserve Bank of India in a better manner due to single entity on account of merger. Better ALM System is a vital area / function of the Banking System.

Better Treasury Management / Systems:

“One third” of the total sources of funds (Either Demand or Time Deposits and Own Funds) of the banks are managed by the Treasury Departments of the Banks. Due to availability of higher funds for Investments, number of opportunities and fine portfolio investment is possible in Treasury Operations of the acquiring bank, the acquiring bank can search for better investment opportunities in both in domestic money and foreign markets to earn more income through Treasury Operations (Trading Book).  Framing good investment policy guidelines is possible due higher volume of funds in Treasury Operations. Better or optimum utilization existing staff skills of Treasury Operations acquiring bank, thereby it not only mitigates the Market Risks of the acquiring bank but also to maintain Fine Liquid funds and it reduces the Borrowings from the Money Markets and maintenance of CRR and SLR guidelines of RBI etc. End result of the acquiring bank is, it increases Treasury Profits.

Implementation of Basel III accord:

Basel III accord is to be implemented by Indian before 31st March, 2019.  This is a big challenge to Indian Banks due to the following reasons:

  • It requires huge amount of Addition Capital – both Tier-I and II. Capital Conversation Buffer, Counter Cycle Capital Buffer etc.
  • Credit, Market and Operational Risk are not within control in Indian Banks till date. Year-on-Year these Risks are on increasing trend particularly in “Credit Risk” and “Operational Risk”.
  • Most of the Banks are not ready and preparedness is also slow for full-fledged implementation before 31st March, 2019.
  • PSBs are depending on Government of India for additional Capital requirements for CAR / CRAR through annual financial budgets of the Government.

Due to following different practices / policies, Systems and Procedures, Strategies adopting by different banks for both Loan book and Trading Book, the degree of these three important Risks i.e., Credit, Market and Operational Risks are differ from bank to bank.  For operational risk, most of the banks are following the “Basic Indicator Approach” till date.  Lot of improvements and research or business models are required in this area i.e., developing Risk Mitigation Models, Risk Management Practices etc. CAR or CRAR is comfortable in some Banks and in other this position is bad. Once merger happens, this position will improve further due to the following reasons:

  • Uniformity in implementation of Risk Management Practices.
  • Additional Research in this area overcomes these risks due to size and volume of Bank Business.

For better implementation of Basel III, merger of banks is one good strategy to mitigate the important risks of the Indian Commercial Bank i.e., Credit, Market and Operational Risks.

INFORMATION TECHNOLOGY BENEFITS

Technology up-gradation:

Each bank maintains different IT Servers to store their business data as well as processing of daily bank transactions, in addition to the main server of the bank, Disaster Recovery Management (DRM) Servers are also established in different places to mitigate the IT / Technology Risk and also for effective implementation of Business Continuity Plan (BCP) as per regulator guidelines.  For IT Systems, they are paying huge amount of Annual Maintenance Costs (AMC) and from time to time whatever additions to the existing software (while introducing new deposit / advance products), they are paying huge amount of fees to the IT Companies. Banks also paying huge amount “Communication Systems” for smooth functioning of bank branches across the country like City Aggregation Points (CAPs) etc. Once merger happens, these costs will be saved to a large extent to the acquiring bank due to merger of all Data files of all Banks into one server.  Here, the acquiring bank will get savings not only in IT Capital Expenditure but also Variable Cost (Information Technology costs) in the Bank.

Optimum utilization Alternate Delivery Channels:

Alternative Delivery Channels like ATMs, CDMs, Pass Book Printing Machines and Kiosks established by different banks under same group and most of these Alternate Delivery Channels flooded in certain areas and less or no in other places.  Once, merger happens the excess / extra alternative channels will be relocated or shifted to the needy places.  Thereby all customers at all locations will use the alternate delivery channels of the Bank without any further capital expenditure to the acquiring bank.  The Cash Replenishment Costs, maintenance cost of ATMs, CDMS, Pass Book Printers, and Kiosks will reduce drastically with revised Service Level Agreements (SLA) on account of higher volumes due to merger. Thereby per transaction cost of alternative delivery channels will decrease due to optimum utilization of existing alternate delivery channels. Additional Capital Expenditure for installation of alternative delivery channels will not arise for a period of 3 to 4 years after merger to the acquiring bank.

RISK MITIGATION BENEFITS

  • Controlling Market, Credit and Operational Risks:

Controlling the Three important Risks is need of hour in the Banking Industry, otherwise it leads to decrease in Profitability of Bank and also it attracts more Capital to maintain the CAR or CRAR as per Basel III.  The rating of the Bank is primarily based on, how the bank is taking measures to mitigate these three important risks.  Attracting the Capital and subordinate debt from the Primary Market through IPO is also a big challenge to the Banks as their CAR, Net Profit is low and also high NPAs.  In case public sector Banks it is very difficult to the Central Government to pump additional capital the needy banks from time to time through Finance Budget of the Country. The only one alternate available to the Banks is to mitigate all the Three Important with the help suitable Risk Management Practices.

  • Duplication of Finance:

Duplication or double financing is on increasing trend in the Banking Industry due to mass expansion of the Bank Branches, massive lending and pressures on achievement of Business Budgets of Bank Branches by the controllers, non-insisting of “No Due Certificates” by the Branches, waiver of Collateral Security in certain advances are leads to double financing in Banks.  This trend is more in Retail Advances like CAR Loans, Personnel Loans etc. even though CIBIL Tracking Systems exists in the Bank.   In Rural and semi-urban places particularly in Self-help Group finance, Government Sponsored Schemes and some Agriculture Segment Product Loans are enjoying more than one bank by certain borrowers.  Due to Loan waiver scheme or settlement of Insurance Claims on account failure of crops etc. these borrowers are again enjoying these additional benefits from Government etc. Double finance, over finance to a single borrower by the Bank also leads to NPAs. Once merger happens, these irregularities can be arrested to a large extent.

  • Better implementation of Risk Focused Internal Audit, Concurrent Audit and Statutory Audit:

Due rationalization of Branches, Audit Costs will reduce further. Strict implementation of Risk Focused Internal Audit (RFIA) results in mitigates the three important risks of the Banks i.e.

  • Credit Risk
  • Market Risk
  • Operational Risk

Due to merger, implementation of “e-concurrent audit” and uniformity in implementation of RFIA across all Branches, and fine tune the “Audit System” not only decreases the above risks and it leads lower provisions and lower Capital for CRAR or CAR and Audit Costs to a large extent.

Year end Accounts or finalization Financial Statements in distributed manner are to be scrutinized by the Statutory Auditors, Zone-wise, Circle-wise for Group Banks is a time consuming process and huge costs incurred in this process i.e., both Audit Fees Cost and also Manpower Cost (People involved in the Year end Audit Process).  On account merging and through rationalization of Branches, Regional Office, Zonal Offices these costs will reduce substantially and early declaration Financial Results of the acquiring Bank is possible and duplication cost and wastages can be eliminated drastically.

BENEFITS TO STAKE HOLDERS

  • Easy to supervise by the Regulator and Government of India:

“Span of Control” of Banks by the Regulator and Government of India are in increasing trend on account of increase in number of banks in the country.  Thereby, it may leads to dilution in controlling all banks in the country by both Regulator and Government of India.  On account of mergers the number of Banks will come down drastically and it is very easy for the regulator and also Government Authorities to supervise monitor and control less number of Banks. To implement Basel-III, KYC/AML and supervise limited number of Banks is easy due to mergers.  Control higher number of Banks, monitor their Boards, Appointment of Chairman’s and Managing Directors, Controlling NPAs, implementation of Basel-III, providing additional capital through budgets and control of irregular practices etc., by both Regulator as well as the Government is a big challenge / task to the Regulator. Restricted the Banks through mergers is a best strategy both to the Regulator and Government to have a better control and monitor the limited number of banks, thereby the efficiency and functioning of the banks will improve substantially.

  • Better implementation of Corporate Governance:

One Board instead of multiple Boards for different group entity Banks, One Audit Committee instead of multiple Audit Committees and other Committees as defined under Corporate Governance as per SEBI listed guidelines is possible through merger. This not only reduces the huge administrative costs, but also implementation or recommendations of the multiple committees is a big task to the Group. Acquiring bank can implement Corporate Governance in a better manner than in distributed boards in group entities. Multiple Annual General Body Meetings and declaration of results after completion of all entities is a time consuming process, duplication process, wastages of resources and a costly affair.  Through merger, single Annual General Body Meeting, Corporate Governance Practices and Single Board meetings gives reduction in administrative cost and timely completion of Balance Sheet finalization to be submitted to Stock Exchanges, SEBI and also to the Shareholders of the Bank (including all stake holders of the bank).

  • Better Customer Service:

Number of banks under one Group creates confusion to the customer while purchasing a bank product from group entity banks, due to merger this confusion will decrease.  He need not verify the product price and its features from different banks under a single group entity.  Due to merger, he can approach only one Bank instead of multiple banks.  Reduction in various Service Costs due to merger and also Customer Complaints Grievance mechanism will strengthen due to size thereby it increases the customer satisfaction levels. Good Customer Service and implementation of best banking practices followed across the globe in acquiring bank is possible due size results and it increases Business Growth and market share of the acquiring Bank.

  • Business Competition within the Group:

Competition within the Group is not a healthy sign.  In short run one bank may benefit in business growth levels but in long run it affects the profitability of the bank. Due to implementation of Base Rate of Interest, Marginal Cost Rate of Interests in the market and these rate of interest are differ from bank to bank on account of their cost of sources of funds, overheads and profit margins etc, competition within the group spoils the image and also group profit in future. Even though the Banks are doing business under one Logo, competition among the bank branches within the Group not only reduces the spread of the Bank, but also it creates “Image Risk” to the Group in the market or in public. This weakness will en-cashed by others players in the market.  Once, merger of group entities into one, this type of market practices will not arise. Healthy competition with other banks will prevail in the market.

OTHER BENEFITS

  • Implementation of Systems and Procedures:

Uniformity in implementation of Systems and Procedures across the Group entity Branches is not only mitigates the various Risks of the Banking Operations but also it gives good results to the acquiring Bank as a whole.  Different banks under same group following different Systems and Procedures may lead to difference in functioning and it leads to difference in business performance results.  On account merger, all branches of the acquiring bank will implement the same Systems and Procedures thereby benefits will accrue. From time to time implementation Revised, New Systems and Procedures is possible across all branches gives good results. Implementation of Best Banking Practices is possible at all Branches in merged environment due to size.

  • Uniformity in implementation of Strategies:

Different banks are following different strategies to mobilize the business, to increase their market share and also to mitigate the various risks in operational areas. Due to this, profits, productivity levels, work culture, market share and financial strength of the Balance Sheets will differ from one Bank to another Bank.  Some Banks, due to small in size and lower Capital or funds, they may not implement the Good Strategies or Systems, which is a costly for them,  thereby it affects the business growth and also financial position of the Bank. Uniformity in implementation of Strategies across all Branches by acquiring bank due to size overcome the above issues.

  • Easy to implement Best Banking Practices:

Different banks are following different control systems and procedures to complete the day today business operations of the Bank. The performance and degree of risk levels of the business operations of the Bank is mainly depends on the implementation of best banking practices in the following business operations i.e.

  • Marketing Function.
  • HR Function.
  • Operations Function.
  • Risk Management Practices.
  • Information Technology Function.
  • NPA Function.
  • Treasury Function
  • ALM Function
  • Administration Function etc.

Due to differ in Systems and Procedures or Book of Instructions or implementation of strategies from one Bank to another Bank, the performance and financial strength of the Bank are not comparable i.e., inter firm or intra firm comparisons. Overall efficiency of the Bank improves a lot and in turn all stakeholders will be benefited due to efficient implementation of uniform Systems and Procedures across all Bank Branches.

  • Increase in Productivity Levels:

Productivity levels of the Banks are differing from Bank to Bank on account of the following:

  • Policies and Organization Practices
  • Implementation of Standards or Bench marks
  • HR Training (On Job or Institutional Training) and HHh HH\HR practices
  • Systems and Procedures
  • Risk Management Practices
  • Work Culture of the Organization etc.

Market share, Goodwill and Brand Value of the Bank are based on the above factors. The ultimate result of higher productivity leads to increase in Top and Bottom Line of the Bank. Due to merger the acquiring bank good practices as mentioned above, will be implemented in the all merged entities (Branches also), thereby the overall efficiency of the Bank will improve and all stakeholders of the acquiring bank will be benefited.

Conclusion Remarks:

Merger gives more benefits to the acquiring bank particularly reduction of Fixed and Variable costs and it avoids the wastages of expenditure to a large extent.  In public sector Banks, ‘Expenses Share’ in Total Income of the Bank is more than 20% and the ‘Manpower Cost’ in Total Expenses is more than 16%. Hence, these costs will be reduced drastically. In addition to this, acquiring bank can use Information Technology in a big way and optimum utilization of existing Alternate Delivery Channels like ATMs, Mobile Banking, CDMs, Pass Book Printers, POS Machines, Internet Banking, Business Correspondents or Customer Service Points and Call Centres etc. to reduce the cost per transaction of the bank and also to increase the bottom line. This is possible through mergers thereby the acquiring Bank can afford to charge “Low Rate of Interest” on their Advance Products.  Lower Rate of Interest on advances boosts the economy growth of the country further and also it increases the Business Levels, market share and bottom-line of the acquiring Bank.

But one important factor to be keep it mind by the acquiring bank in merging process i.e., Strengthen the Organizational Structure i.e., Centralization and Decentralization of operational areas, span of control of the Bank. Undoubtedly merger gives number of advantages to acquiringr bank, at the same time Controlling is very difficult due increase in size of the Organization, Business Operations and Volumes.  To overcome this problem, from day one of merging processes, the acquiringr bank should think about the Control aspects for each and every function i.e., how effectively and efficiently the acquiring bank control Bank Branch located in nook and corner of the country.  The objective of merger will be defeated, if control systems are not well established properly by the acquiringr bank.   Due to availability of latest Information Technology in the country, controlling Branches located in villages from the Head Office is not a big problem by the acquiring Bank. To mitigate THREE important Risks of the Banks i.e., Credit Risk, Market Risk and Operational Risk, the acquiring bank should strengthen the Risk Management Department, Risk Focused Internal Audit, Strict implementation of System & Procedures etc. Then maintenance of adequate Capital Adequacy is not a problem to acquiring bank due to merger.

-Dr. P. Siva Rama Prasad, FCS

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