The Reserve Bank of India (RBI) disclosed a draft scheme for the amalgamation of Punjab and Maharashtra Cooperative (PMC) Bank with Unity Small Finance Bank (USF). This comes as a notable move after PMC bank was placed under restrictions due to fraudulent activities leading to a significant dip in its net worth.
Important Points About the Scheme
As per the draft scheme, depositors of PMC bank will recover their money in a span of 3-10 years following the amalgamation. However, interest on any interest-bearing deposit with PMC bank will cease to accrue beyond March 31, 2021.
The Significance of the Amalgamation
Unity Small Finance Bank’s takeover of PMC Bank’s assets and liabilities, including deposits, enhances the protection for the depositors. USF Bank is set up with a capital of about Rs 1,100 crore, surpassing the regulatory requirement of Rs 200 crore needed to establish a small finance bank, according to the guidelines for on-tap licensing of small finance banks in the private sector.
About Bank Mergers
Through mergers, banks can enhance shareholder value and cater to needs more effectively as a result of combined business operations and ventures. The process of bank consolidation is regulated under the Banking Regulation Act, 1949. This act empowers RBI to propose suspending a bank’s operations and devise a scheme of reconstitution or amalgamation.
Recent Instances of Bank Mergers
2019 witnessed the announcement of the most extensive consolidation plan of Public Sector Banks (PSBs), merging 10 banks into just 4. In the same year, the Cabinet Committee on Economic Affairs approved the merger of state-run Vijaya Bank, Bank of Baroda, and Dena Bank. Additionally, in 2017, State Bank of India merged with five associate banks.
Benefits of Bank Mergers
Consolidation of banks can enhance their global, national, and regional presence. It can lead to stronger governance and increased profitability for the enlarged institution. Other benefits include boosted lending capacity, improved operational efficiency due to shared overlapping networks, enhanced technological synergy, increased market resource raising capabilities, and simplified monitoring procedures.
Challenges Associated with Bank Mergers
Despite the benefits, bank mergers often bring certain challenges. Decision-making might slow down at top levels, and credit delivery might drop due to hesitations among senior officials. Geographical synergy might lack during the consolidation process. Furthermore, a merger with a weaker and under-capitalized Public Sector Bank could hinder the recovery efforts of the entity. The weaknesses of one bank might get transferred to the merged entity, potentially weakening it. There are also concerns about the economy’s slowdown and the timing of these mergers. With private consumption and investments on a declining trend, there is a need to lift the economy and increase credit flow, making these decisions potentially harmful in the short term.
