Bank Mergers in India: Impact on Borrowers

Bank Mergers in India: Impact on Borrowers

Last year in August, the Finance Minister of India, Nirmala Sitharaman, announced that the 10 public sector banks will be consolidated into 4 mega state-owned ones. The move will surely affect the retail customers, including account holders of the amalgamating banks.

While some mergers were completed earlier, some happened on 1st April 2020.

Here are the mergers that happened on 1st April this year:

Anchor Bank Amalgamating bank Core Banking System PSB Rank by Size

Union Bank of India

Corporation Bank

Finacle

5th largest

Andhra Bank

Punjab National Bank

Oriental Bank of Commerce

Finacle

2nd largest

United Bank of India

Canara Bank

Syndicate Bank

iFlex

4th largest

Indian Bank

Allahabad Bank

BaNCS

7th largest

What is a Merger?

A merger is a process of combining two companies into one larger company. In a merger, there is an anchor bank and an amalgamating bank(s), where the latter one gets merged with the former.

For example, in the consolidation happened in April 2019, Dena Bank and Vijaya Bank (amalgamating banks) were merged into Bank of Baroda (anchor bank). Due to this merger, the operations of amalgamating banks were handed over to the anchor bank.

How will These Mega-Mergers Impact Borrowers?

Retail customers of the amalgamating banks will get directly affected, whereas borrowers of the anchor bank will not face much change. Also, shareholders of all banks involved in the said mergers will be impacted.

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If you are a customer of the banks being merged, these mergers can have some significant impact on you.

Here are some of those implications:

Change in account numbers & customer IDs

You, as a borrower, will get a new account number and customer ID. You must check that your email address, residential address, and mobile number are accurate and updated with your bank to receive official intimations regarding the change in account numbers.

Also, all your accounts will now be linked to a single customer ID. For instance, if you have accounts with Corporation Bank and Andhra Bank, both accounts will now be allotted a single customer ID.

Re-submission of account details

You must have given your account numbers and IFSC codes for several financial transactions, including auto-credit of salary, auto-credit of dividends through ECS, auto-debit of various bills & charges, and so on.

If you have been allotted new account numbers or IFSC codes, the same will have to be updated with various third-party entities (including the income tax department for a refund of tax, insurance companies for receiving maturity proceeds, mutual funds for the redemption amounts, National Pension System, etc.) where you had given details of your accounts previously.

When five associate banks of the State Bank of India were merged a few years ago, the bank changed IFSC codes and 1,300 branches names.

Please note that the anchor bank will have to continue all electronic clearing service (ECS) mandates as well as post-dated cheques (PDCs) after the merger. Get in touch with your bank, insurance company, and fund house to issue fresh ECS mandates, if required.

Relocation of local branches & ATMs

You will have to deal with the process of branch rationalisation. Your existing home branch could shut down if the anchor bank has its own branch in the same locality. Check new IFSC and MICR codes of your branch and account as you will need it for fund transfer and other financial transactions.

One of the main advantages of this is that the branch network may become larger, providing easier access to bank branches. This can happen only if the anchor bank does not shut down all the branches of amalgamating banks.

For instance, the combined entity of the United Bank of India, Punjab National Bank, and Oriental Bank of Commerce will turn into the second largest PSU bank in the country post merger. It will have the second largest network of 11,437 bank branches. With this, you can also have access to a larger number of ATMs in your area.

Lending and deposit rates to be decided by the anchor bank

If you have taken a loan from merging banks, your loans will get impacted. Let’s understand this with an example.

Suppose you have taken a loan from Vijaya Bank or Dena Bank. All MCLR-linked retail loans of the amalgamating banks will be migrated to the MCLR of the anchor bank. In this case, the MCLR-linked retail loans of Dena Bank and Vijaya Bank are migrated automatically to the MCLR of Bank of Baroda.

In this instance, before amalgamation, the MCLRs of Dena Bank and Vijaya Bank were 8.80% and 8.75% respectively. Now, your retail loans will be linked to the MCLR of the Bank of Baroda, which is 8.65% as of March 2019. Hence, retail loan customers of Vijaya Bank and Dena Bank will be benefited from the lower MCLR of Bank of Baroda. However, the merger will have no impact on Bank of Baroda’s customers.

Exchange of credit/debit cards

If you own credit cards and/or debit cards of the amalgamating banks, your cards may have to be exchanged with the cards of the anchor bank without any disruption in services.

Increase in paperwork

The paperwork may increase due to the amalgamation process and more requirement to submit your documents to the anchor bank.

Impact on shareholders

Shareholders of all the publicly listed banks who are involved in the mergers will be affected. Shares of the anchor bank will be allocated to the shareholders of amalgamating banks, in a pre-decided ratio. The extent of the impact on shareholders will be known after the announcement of the swap ratios. Also, the merger’s impact on the prices of the shares on the exchanges is already visible after the mergers were announced.

The impact of the merger is great on the borrowers. And due to the rapidly spreading COVID-19 pandemic in the country, customers have to wait for more details regarding the impact of the merger in the coming days.

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