On June 1, 2011, India had joined the world league with US and EU as it was the day when merger control under the country’s Competition Act had went live. This had emphatically given the CCI, the power to review an M&A transaction’s competitive effects, where parties, whether in India or overseas, exceed certain Indian and global asset-size benchmark.
Innumerable advantages of M&A activity in India
There are innumerable advantages of M&A activity in India, especially when it comes to its NPA crisis. With banking sector reeling under the dead weight of its bad loans, timely resolution is the key to revival as loss can be mitigated smoothy and timely. This is due the fact that loss of shareholders and depositors is positively correlated with time taken for banking resolution. Luckily, M&A helps to mitigate this detestable, odious problem with its timely resolution policy.
This can be seen as the developments in the cases handled by CCI have been significant and rapid, with 834 transactions notified to the CCI, with 824, or 98.8%, cleared in an average of 20 days, and none prohibited.
How effectively does bank mergers lead to mitigation of the odious NPA problem of the banking sector?
The bank reeling under the weight of its bad loan can significantly be merged with banks with, if not insurmountable, but at least good profits and good administration. As it is known that banks’ NPAs rise due to its flawed management programme, thus integration with a bank with good management can lead to better management and mitigation of the other bank’s crisis.
This implies that when banks are merged, strong bank can significantly take some measures, in association with other bank’s top management, for improving services. This can include improved recovery measures, transfer of NPA accounts to specially designated branches, named Asset Recovery branch or with permission of top management, subject to legal restrictions, sell NPAs to an organization specialized in recovery at a discount.
It is to be noted that the percentage of NPAs is also reduced due to the integrated capital of the two merging banks. Thus, the merger of an indebted bank with a bank of good business and healthy deposits, improvement in good total business can take place.
To top it all, merged banks or big bank will also be able to get access to refinance, which is significantly available to only a few big banks. However, these require freedom to banks to function competitively and utilize best expertise.
Additionally, a larger bank can manage its short- and long-term liquidity quite better. There will not be any need for overnight borrowings in call money market and from RBI under Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF). In contrast to government’s reluctant and unprofitable approach of recapitalization, mergers usually guarantee larger capital base and higher liquidity, thus the burden on the central government to recapitalize the public sector banks again and again comes down substantially
How can mergers and increased profits help economy?
Mergers ensure better efficiency ratio for business operations as well as banking operations which is ultimately beneficial for the economy. Consequently, it leads to increase in profitability and helps in raising the standard of living which is absolutely crucial for a growing economy like India. As a matter of fact, chances of survival of underperforming banks increase significantly and hence customer trust remains intact which is vital for the Economy and the bank which have to maintain its goodwill. The weaker bank gets merged into stronger one and gets the benefit of large-scale operations
Thus, mergers are important for the consolidation and expansion purposes of banks. Additionally, they are also crucial for Economy as they are most of the times successful in saving weak banks which fail in meeting expectations or maintaining their bad loans. But on the other hand, Mergers create variety of problems which can cause great damage if the process of merging is not executed properly as various cultures are involved in transition.
If merging is needed, it must be executed in a manner which leads to an environment of trust and agreement among the people of both the organizations. If people, work culture and vision are blended together amicably, merging will definitely have synergic effects and create a win-win situation.