Bank Mergers Have Benefited The Sector, Says The New Study.
The study's findings show that, on average, bank mergers in India have been good for the industry since they increase acquirers' financial performance and efficiency.
According to a study by researchers at the Reserve Bank of India, bank mergers have helped both the acquiring bank and the acquired bank. While the bank merger increased the efficiency of the acquiring banks, it enhanced the value of the shareholders of the acquired banks as well.
The observations of the research paper mention that, on average, bank mergers in India have benefited the banking industry because the acquirers’ financial performance and efficiency increased because of the bank merger. These conclusions are also applicable to recent bank mergers that took place in 2019 and 2020, for which there is currently scant information.
The method used for mergers in 2019–2020, for which appropriate data are not yet available, shows that mergers increased the shareholder wealth of the acquiree banks, notwithstanding a brief plunge in the share price of the banks that have been acquired.
The title of the research paper that gave the news in favor of bank mergers is “Do Bank Mergers Improve Efficiency?”
As per the study, bank mergers have paved the way for increased corporate activities, geographic diversification, and acceptance of more engaging business solutions.
The research states that acquirers’ technical efficiency grew from 90.88 in the pre-merger era to 93.80 three years after the merger, and to 94.24 five years afterwards. The significantly poorer organizational and management capabilities in the acquired banks did not appear to be a problem, according to the research. According to the report, the mergers permitted an expansion in the scale of productive capacity. The expanded access to the purchased banks’ branch network that the amalgamated firms now had was also advantageous.
The improvement in the percentage of interest income and post-merger geographic diversity are the key drivers, according to a detailed analysis of elements that may have contributed to efficiency gains, the study concluded.
As more than two years have passed since the mega-merger and the effect assessment in the literature appears to be split, the research gains relevance. On the one hand, some researchers contend that “the merger decisions were not necessarily on efficiency grounds, and therefore, post-merger benefits are minimal”; although some studies suggest that the non-performing assets (NPAs) of weak merging banks decreased by 10%, almost entirely as a result of a decline in strategic defaults. The authors explain this disparity in evaluation by pointing to the various research’ use of varied methodologies.
It’s safe to assume that the majority of mergers between PVBs (private sector banks) were pushed by the market, while those between PSBs (public sector banks) were driven by the government. According to their research, efficiency trends between acquiring firms and their acquirees were constant across ownership patterns, according to the authors. They continued by saying that it may not be accurate to single out government-led mergers alone as being intended to accommodate weak banks with stronger ones.
Increases in liquidity indicators show that the combined entity’s intermediation function after the merger increased; according to the research, banks were able to channel a bigger proportion of deposits and assets into loans.
The increased capital adequacy and NPA provisioning metrics show that the merged firm has improved in its ability to withstand financial risks after the merger. Even after correcting for industry-wide factors, the acquirers’ financial performance increased post-merger compared to pre-merger, both in the short- and medium-term.
The minds behind the Research Report.
Snehal Herwadkar, director of the department of Economic and Policy Research, Shubham Gupta, and Vaishnavi Chavan, a former manager and research intern at the Reserve Bank of India, respectively, are the authors of the study. The authors’ opinions are the ones that are represented in the study; they do not necessarily represent those of the Reserve Bank of India.
A brief history of bank mergers.
There were 40 bank mergers between 1997 and 2022, of which 12 included private sector banks (PVBs) and public sector banks (PSBs), 16 involved PSBs, and the remaining 12 involved PVBs and international banks. With effect from April 1, 2020, 10 public sector banks (PSBs) were combined into four, marking one of the largest consolidations in the industry.
- Vijaya Bank and Dena Bank were acquired by the Bank of Baroda.
- Indian Bank merged Allahabad Bank with itself.
- Punjab National Bank acquired the Oriental Bank of Commerce United Bank of India.
- Syndicate Bank was merged with Canara Bank.
- Andhra Bank and Corporation Bank were acquired by Union Bank of India.
The last call in favor of bank mergers.
Given past findings that mainly weak institutions were bought by stronger banks, this is not surprising. Because the markets expected the acquiree banks’ financials to improve following the merger, they responded favorably to the news of the merger, according to the authors. So, the data so far shows that mergers have been a successful instrument for increasing efficiency in the Indian banking industry.
Edited by Prakriti Arora