PMC Bank, Unity SFB merger scheme: RBI seeks views on draft

• The Reserve Bank of India (RBI) on Monday released a draft scheme of amalgamation of fraud-hit Punjab and Maharashtra Cooperative (PMC) Bank and Delhi-based Unity Small Finance Bank. Unity SFB is a joint venture between Centrum Group and BharatPe.
• It commenced operations as a small finance bank (SFB) with effect from November 1.
• According to the draft scheme of amalgamation, following the amalgamation, depositors of PMC Bank will get their money back over a period of 3-10 years.
• It said the transferee bank (Unity) will first make the payment of up to Rs 5 lakh or less received from DICGC to eligible depositors.

Merger of Banks

• In a merger, banks can profit from combining business activities and ventures. Together they can increase shareholder value and better meet their needs.
• Bank integration procedures are provided in accordance with the Banking Regulation Act of 1949. Article 45 of the law empowers the central government to apply for the suspension of business by banking companies and to develop plans to recover the merger.

Benefits:

• Competitive: The consolidation of Banks helps in strengthening its presence globally, nationally and regionally.
• Capital and Governance: The government`s intention is not just to give capital but also give good governance. The financial system of the enlarged institution will be more profitable and protected. The lending capacity of the banks will increase and their balance sheet would also be strong.
• Efficiency: It has the potential to reduce operational costs due to the presence of shared overlapping networks. And this improvement in operational efficiency will reduce bank borrowing costs.
• Technical Synergies: All integrated banks within a particular bucket share a common core banking solution (CBS) platform for technical synergies.
• Self-sufficiency: Large banks have a better way to get resources from the market than relying on finance.
• Monitoring: As the number of banks declines after the merger process, it will be easier for governments to allocate capital, performance milestones, and monitor.

Challenge:

• Decision-making: Banks to be merged are expected to slow down decision-making at the highest level as senior bank officials postpone all decisions and reduce the provision of loans in the system.
• Geographical synergies: During the merger process, the geographic synergies between the merged banks are somewhat lacking. In three of the four merger cases, the merged banks serve only certain regions of the country.
• Economic slowdown: That's a good move, but the timing isn't right. The economy is already slowing, and consumer spending and investment are declining. Therefore, it is necessary to stimulate the economy and increase the flow of credit in the short term, and this decision blocks those credits in the short term.
• Weak Banks: Complex mergers with weak PSBs and lack of capital can stall bank recovery efforts as banks' weaknesses can be taken over and the merged company can be weakened. "