Nationalisation of banks -I

By the early 1960s, the Government of India realised that a significant share of deposits coming from the masses of India was controlled by 14 privately owned commercial banks. Indian agriculture and industries were booming and the need for finance was high. Financial regulations were also very important at that time since those would help shape the nature of the country’s economy for decades to come.

Nationalisation became the watchword even the state airline, Air India, was nationalised in 1953. Acquisition of the Imperial Bank of India in 1955 was the next big step. With Indira Gandhi’s taking over as the Prime Minister of India, the Indian National Congress rallied for a state takeover of some of the major banks in the country.

In what can be deemed a rather hasty move, the government promulgated an ordinance - the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 - thereby nationalising all the 14 banks that were under consideration with effect from the midnight of 19 July 1969.

As a follow-up to passing the ordinance, the Banking Companies (Acquisition and Transfer of Undertaking) Bill was taken up by the Parliament for discussion. It received a clear majority as well as the assent of the President within a month of issuing the ordinance.

In 1980, when Gandhi was re-elected as the Prime Minister for her third term at the PMO, she initiated a second spate of bank nationalisation. This time about six banks were nationalised and the Government of India controlled over 90 per cent of the banking business in the country. Of the 20 banks that were nationalised, New Bank of India was later (in 1993) merged with Punjab National Bank.

Why were these banks nationalised?
The nationalization of banks was a significant move undertaken by the government for the development of the country. Firstly, it instilled public confidence in the banking system encouraging the masses to save and invest.

It allowed for elimination of regional bias and promoted opening up of branches in the remote areas of the country as well, thus strengthening the banking network. By elimination of monopoly or credit competition, nationalization streamlined banking practices in the country, thereby directing funds where it was most necessary – towards industrial and sectoral development – as planned by the RBI and the Indian government.

Introduction to Bank Mergers
As financial intermediates, 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.

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 aHorizontal 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

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.

Current merger plan 2016

The government is said to be considering a mega merger of 26 banks, which will create six big lenders, news agency Reuters reported, citing a government official, on Wednesday.

The proposal envisages major banks like State Bank of India, Punjab National Bank, Canara Bank, Union Bank,Bank of Baroda and bank of india leading the merger.

As a part of the proposal, Syndicate Bank, IOB and UCO Bank will be merged with Canara bank.
Meanwhile, Central Bank and Dena Bank will be merged with Union Bank, the official said.

Other banks like Andhra Bank, Bank of Maharashtra, Vijaya Bank will be merged with Bank of India

SBI merged its five associate bank State Bank Of Hyderabad(SBH), State Bank Of Bikaner&Jaipur(SBBJ,) State Bank Of Mysore(SBM,)State Bank Of Patiala(SBP) State Bank Of Travancore(SBT) and the relatively-newer Bharatiya Mahila Bank(BMB) with itself.

The banks which falls into the category of Nationalized Banks are:-
1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank

NOTE: Thus, in total 20 banks were nationalised. Out of these New Bank of India was merged with PNB in 1993. Thus, now strictly speaking 19 nationalized banks are in existence.

NOTE

• Finance minister Arun Jaitley, in his budget speech , said that the government will consider ceding control of IDBI Bank, slashing its stake to less than 50% from 80.2% now.The privatization drive is part of the larger plan to infuseRs.19,000-20,000 crore of equity into the bank before 31 March 2019 under the Basel-III norms.
• The Cabinet on Wednesday gave its in-principle approval for State Bank of India’s proposal to bring its five associate and Bharatiya Mahila Bank with itself.

By: Balalatha Mallavarapu