Why Merger of Public Sector Banks is not Easy

Even though the Government has given its in principle approval for merger of public sector, the merger process will not be an easy one. Merging such huge banks with huge infrastructure and manpower will have many roadblocks. Let’s see why merger of public sector banks is not easy.

1. Human Resource Issues 

This is not just merger of banks but merger of a huge manpower consisting of lacs of people from diversified culture, environment and places. It is human nature to resist to change. And if you are asked to change after 20-25 years, that is really difficult. Integration of staff in new merged entity will be a tough task. There will be issues on Seniority, promotions, transfers etc. (See – Disadvantages of merger for the Bank Employees)

2. Clash of Cultures 

Merger of public sector banks can not be successful if it is looked into only on papers without taking into account people and their culture. Not only financial fit is important but cultural fit is of prime importance for merger to be success. Thorough communication and ensuring that employees are ready to adapt to change is very important.

3. Lack of commitment of Management

Commitment of management of bank in the merger process is the key to success, which seems difficult in public sector banks. Co-operation of senior management of smaller bank will be difficult.

4. Opposition by Staff Unions

Government will have to take the employee unions into confidence and give assurance that this merger is not first step towards privatization of banks. AIBOC has condemned the government’s idea. AIBEA said that this is a risky.

Staff Unions of Banks will also oppose the idea because many unions of small banks will lose their identity and consequently leaders of the unions will also require to find place for themselves in bigger unions. Another drawback for unions is that many representative of employees on board will lose their posts.

5. Information Technology related issues

Today Banks are completely dependent on Information technology, which is an advantage. But, different banks have different IT solutions from different service providers. For example IFSC Code and MICR etc, which are branch and bank specific will need to be harmonized and communicated to customers. Not just the CBS but Banks use various kinds of softwares for other purposes like loan processing, customer lead generation, auditing, monitoring etc. Migration of data will be painful job and require a lot of care because data loss will be costly.

6. Harmonization of Systems, procedures, goals, business strategies

Different banks have different systems, procedures, policies, plans, business strategies and this needs to be harmonized. Imposing all the policies and procedures of one bank on the employees of other bank will lead to inefficiency and clash. The business strategies will need to be re-aligned for the new entity.

7. NPA situation may worsen 

It is expected that NPA situation will improve with the merger of public sector banks, which is one of the argument given by government in support of merger. But the situation may worsen because during transition period and merger process, recovery will come to a halt. There will be no owner for the task. And in the merged entity also, there will be blame game for the NPAs of other bank.

5. Capitalization 

Bigger Banks will require big capital infusion. Smaller banks struggling with high NPAs are already at alarming level for maintaining the Capital Adequacy and their merger into larger banks to create bigger banks will require the capital.

6. Hardship to customers

Customer will face the hardship atleast during the merger process and initial years, especially customers of the merged banks. Customers of those closed branches will have to find their new branches and establish the contact with the new branch again, they may not feel the same treatment as that in the old branch. The particulars of accounts will change like IFSC, MICR etc., which the needs to be properly communicated to customer, who will also need to change these details with various persons.

The case of merger of associate banks with SBI was different from the merger of other banks firstly because the associate banks were under the control of SBI and secondly this was known to SBI and associates well in time and they had time to harmonize the systems.