Indian Bank, Corporation Bank Can Merge with OBC; Here Are The Biggest Challenges Of Bank Consolidations

Amidst the heat of Public Sector bank (PSB) consolidations going on, the new government is looking forward to another such consolidation. We have kept you updated of all such news on bank amalgamations and the future predictions regarding the same.

The next wave of bank consolidation is planned in the October-December quarter of the current fiscal year. The next amalgamation is said to be between the three lenders- Oriental Bank of Commerce (OBC), Indian Bank and Corporation Bank.

Another Such PSB Consolidation

After the successful experience of recent consolidation of Vijaya Bank and Dena Bank with Bank of Baroda, and merging State Bank of India with five of its subsidiaries and Bharatiya Mahila Bank, the government has gained confidence that continuing more such consolidations would lead to reduction in the current number of PSBs, leaving behind some few strong banks that would compete against best banks of the world.

In another such attempt, the finance ministry is looking forward to combine Indian Bank and Corporation Bank with OBC. Even though there isn’t any formal declaration yet, the ministry will look into the matter soon. OBC recorded a profit of Rs 201.5 crore in the March quarter from a net loss of Rs 1,650.22 crore, lifting the profit to 39%. Corporation Bank and Indian Bank, on the other hand scored a loss of Rs 6,581.49 crore and Rs 190 crore, respectively in the same quarter.

The next round shall take place in the third quarter of FY20 so that enough time is given to banks to correct their balance sheets before embarking mergers so that the strength and credibility of the resultant entity is ensured.

Major Challenges Faced During Mergers

The government evidently believes that PSB mergers will send a message to the world about its reformist zeal and improve investor sentiment at a time when the rupee is under pressure. However, mergers this big of sizable financial assets, sure face some major challenges.

  • Execution: PSBs are basically corporate banks and mirror each other. Each of these banks incorporate thousands of employees, converging customers across various fields. They use different technologies, which even though is easy to integrate, challenging to execute.
  • Expensive Models: The biggest challenge in PSB merger is to cut costs, work efficiently, improve profit per branch and per employee. This becomes difficult as PSBs have very high-cost structure. In the BoB-Dena and Vijaya Bank merger, Dena Bank had the highest cost to income ratio.
  • High Cost of Funds: Weaker and smaller banks merging with bigger ones, tend to have higher cost of funds. With private banks & fintechs already attracting newer customers through better grasp on technology and digital modes, PSBs are facing a major challenge in reducing the cost of deposit. On top of that, merger with banks having higher costs, do not help much.

We shall keep you updated on any such news.

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