Professional Documents
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A
merger involves the total absorption of a of the new company helps it gain and maintain a competitive
target firm by acquiring. As a result one edge.
firm ceases to exist and only the new firm z New Markets:The market reach is improved by the
(acquiring) remains. merger due to the diversification or the combination of two
General, the following are the businesses. This results in better sales opportunities.
advantages of the mergers: The above are a few advantages of Mergers. Due to
z Synergy:The synergy created by the merger of Monopolistic Competition prevailing in the market,
two companies is powerful enough to enhance business every Business Organization is facing the following to vital
performance, financial gains, and overall shareholders value challenges:
in long term.
z Cost Efficiency:The merger results in improving the z Increase in Competition and also Costs (Business
purchasing power of the company which helps in negotiating Overheads)
the bulk orders and leads to cost efficiency. The reduction in z Decrease in Product Price and thereby decrease in
staff reduces the salary costs and increases the margins of Spreads (Profits/Surplus)
the company. The increase in production volume causes the In this scenario Mergers and Acquisitions gives some
per unit production cost resulting in benefits from economies comfortable position to the Business Organizations to
of scale. overcome the above problems.
z Competitive Edge:The combined talent and resources Lot of discussions is happening among the Staff of Banking
Industry and also in Public with regard to merger on the following all places the Administrative Offices (Regional / Zonal Offices) of
NEWS: Banks were located. Due to establishment of Regional Office or
Zonal Offices at strategic cities huge amount of Administrative
Live Mint -22nd May, 2016-E paper: Cost is incurring by the Banks. Once the merger happens, the
India took its first step towards creating a large bank with Regional and Zonal Office will minimize drastically and the
the countrys largest lender State Bank of India (SBI) and its existing Regional / Zonal Offices can be used at optimum level,
five associate banks initiating a merger process. All six are thereby the following savings will arise to the acquiring bank.
state-owned. z High Rental Costs (Real Estate Costs)
A merger would create a banking behemoth with a z Electricity Costs
balance sheet size ofRs.37 trillion, SBI chairman Arundhati z Manpower Costs
Bhattacharya said. z Technology Costs
z Overhead Costs etc.
A to Z Advantages of Mergers Due to Rationalization of Branches on account of merger,
number of Regional or Zonal Offices will also come down
Rationalization AND Economies of Scale are the TWO drastically and effective use of the existing Regional or Zonal
biggest Advantages in the proposed merger, thereby huge Cost Offices of the acquiring Bank is possible. It not only reduces the
Reduction, Increase in Productivity Levels and it strengthens the administrative costs of the Bank, but also reduces wastages /
Balance Sheet of acquiring Bank. duplication / underutilization by the acquiring bank.
z Increase in Staff involvement in work environment. (advertisement costs) decrease substantially. All most all Group
z Easy to implement Standards or Bench marks. Banks are Tie-up with Car Dealers etc. to source the business
z Implementation of Productivity linked salaries is possible. from them and they are paying Higher Commission to them for
sourcing low volume of business in a distributed manner. Some
III. Overhead Cost Benefits of the group banks are using Direct Sale Agents for sourcing of
Business for Car Loans, Housing Loans etc. Due to merger and
G. Minimization of Overheads Costs: with higher volumes of the business of single entity, the cost of
Other than the Interest Costs on Deposits and borrowed funds, sourcing the business through these entities will come down
the next major expenditure to the Banks is Manpower Costs and drastically by modifying the Service Level Agreements-SLAs with
Overhead Costs. The lateral two costs are on increasing trend in Tie-up Agencies, which is beneficial to the acquiring Bank in Long
the Banking Industry. The various overhead costs incurring by run and also control these entities.
the Banks are:
z Stationery and Printing. I. Large Scale Economies:
z Hiring of Premises Costs. Merger leads to increase in Volumes of business and also
z Travelling Expenses. Banking Operations. Once volumes are increase, the acquiring
z Hiring of Cars for Business Purpose. bank will enjoy the benefits of Large Scale Economies in respect
z Technology Costs particularly Hardware Costs and of the following costs:
depreciation thereon. z Decrease in Overheads.
z Electricity Costs. z Decrease in Cash Replenishment Costs of ATMs.
z Annual Maintenance Costs (AMCs). z Decrease in maintenance costs of Alternate delivery
z Advertisement Costs both printed and electronic media. channels including Call Centres.
z Depreciation on Fixed Assets. z Decrease in Advertisement, Selling and Distribution Expenses.
z Generator Hiring Costs etc., z Decrease in Information Technology Costs to a large extent.
Due to modernization of Branches, it increases the ambience z Decrease in commission payable to business sourcing
cost of the Branches. In addition to this re-design, change in agencies.
layout or re-location of the Branches is happening on frequent z Decrease in Rental Costs due merging of Big Branches and
intervals for the Convenience of Customers and their comfort CPCs
sake, thereby the overheads are on increasing trend. Nearly 70% z Decrease in Stationery, Printing Expenses.
to 75% of the Branches are under Air-conditioned environment Benefits derived both in Fixed and Variable Costs to the
(including ATM Rooms, Kiosks etc.), Central Processing Centres acquiring Bank. At the same time, the acquiring bank will incur
(Retail Loans, SME Loans), Liability Central Processing Centres additional costs for controlling of Branches or CPCs. But if we see
etc.,) thereby overheads of the Banks is on increasing trend. the incremental cost with incremental benefit, the incremental
Once, merger happens, these costs will come down drastically benefit is more than the cost. Hence, the merger reduces the
in the acquiring bank due to rationalization of branches and overall overhead costs of the acquiring bank.
also economies of scale. In most of the Branches incremental
overhead cost is neither matching nor less than the incremental VI. Financial Benefits
benefit from the Business. If incremental cost is less than the
incremental benefit then it is profitable to the bank through its J. NPA Management:
banking operations. Definitely merger will gives some savings the The side effects of increase in Non-performing Assets of the
acquiring bank in this regard. Banks are as follows:
z It increases the Credit Risk.
H. Control on wastage of Advertisement Expenses: z It attracts more provisions.
Huge amount of advertisement Costs are incurred by the Banks z It requires more Capital to fulfill the Capital Adequacy Ratio
for popularizing their Home Loans, Car Loans, Personnel Loans of the Bank.
etc., Duplication and wastage is happening in Group entities z It reduces the Bottom-line of the Bank.
of the Bank to sell the same product by different banks. Same z It reduces the Credit Rating of the Bank.
product with same features will be advertised by different entities. z It increases the Asset Liabilities Mismatches.
It is a wasteful exercise and less benefit the Group entity. Once z It increases Borrowings by the Treasury Department at High
merger happen common advertisement cost by the acquiring Cost to fulfill the ALM mismatches.
bank, thereby the wastages will be controlled and overheads z It decreases the Liquidity position of the Bank.
possible across all branches gives good results. Implementation on the above factors. The ultimate result of higher productivity
of Best Banking Practices is possible at all Branches in merged leads to increase in Top and Bottom Line of the Bank. Due to
environment due to size. merger the acquiring bank good practices as mentioned above,
will be implemented in the all merged entities (Branches also),
X. Uniformity in implementation of Strategies: thereby the overall efficiency of the Bank will improve and all
Different banks are following different strategies to mobilize the stakeholders of the acquiring bank will be benefited.
business, to increase their market share and also to mitigate the
various risks in operational areas. Due to this, profits, productivity Conclusion Remarks
levels, work culture, market share and financial strength of the Merger gives more benefits to the acquiring bank particularly
Balance Sheets will differ from one Bank to another Bank. Some reduction of Fixed and Variable costs and it avoids the wastages
Banks, due to small in size and lower Capital or funds, they may of expenditure to a large extent. In public sector Banks,
not implement the Good Strategies or Systems, which is a costly Expenses Share in Total Income of the Bank is more than 20%
for them, thereby it affects the business growth and also financial and the Manpower Cost in Total Expenses is more than 16%.
position of the Bank. Uniformity in implementation of Strategies Hence, these costs will be reduced drastically. In addition to this,
across all Branches by acquiring bank due to size overcome the acquiring bank can use Information Technology in a big way and
above issues. optimum utilization of existing Alternate Delivery Channels like
ATMs, Mobile Banking, CDMs, Pass Book Printers, POS Machines,
Y. Easy to implement Best Banking Practices: Internet Banking, Business Correspondents or Customer Service
Different banks are following different control systems and Points and Call Centres etc. to reduce the cost per transaction
procedures to complete the day today business operations of the of the bank and also to increase the bottom line. This is possible
Bank. The performance and degree of risk levels of the business through mergers thereby the acquiring Bank can afford to charge
operations of the Bank is mainly depends on the implementation Low Rate of Interest on their Advance Products. Lower Rate of
of best banking practices in the following business operations i.e. Interest on advances boosts the economy growth of the country
z Marketing Function. further and also it increases the Business Levels, market share
z HR Function. and bottom-line of the acquiring Bank.
z Operations Function. But one important factor to be keep it mind by the acquiring
z Risk Management Practices. bank in merging process i.e., Strengthen the Organizational
z Information Technology Function. Structure i.e., Centralization and Decentralization of operational
z NPA Function. areas, span of control of the Bank. Undoubtedly merger
z Treasury Function gives number of advantages to acquiringr bank, at the same
z ALM Function time Controlling is very difficult due increase in size of the
z Administration Function etc. Organization, Business Operations and Volumes. To overcome
Due to differ in Systems and Procedures or Book of Instructions this problem, from day one of merging processes, the acquiringr
or implementation of strategies from one Bank to another Bank, bank should think about the Control aspects for each and every
the performance and financial strength of the Bank are not function i.e., how effectively and efficiently the acquiring bank
comparable i.e., inter firm or intra firm comparisons. Overall control Bank Branch located in nook and corner of the country.
efficiency of the Bank improves a lot and in turn all stakeholders The objective of merger will be defeated, if control systems are
will be benefited due to efficient implementation of uniform not well established properly by the acquiringr bank. Due to
Systems and Procedures across all Bank Branches. availability of latest Information Technology in the country,
controlling Branches located in villages from the Head Office
Z. Increase in Productivity Levels is not a big problem by the acquiring Bank. To mitigate THREE
Productivity levels of the Banks are differing from Bank to Bank important Risks of the Banks i.e., Credit Risk, Market Risk and
on account of the following: Operational Risk, the acquiring bank should strengthen the Risk
z Policies and Organization Practices Management Department, Risk Focused Internal Audit, Strict
z Implementation of Standards or Bench marks implementation of System & Procedures etc. Then maintenance
z HR Training (On Job or Institutional Training) and HR practices of adequate Capital Adequacy is not a problem to acquiring bank
z Systems and Procedures due to merger. MA
z Risk Management Practices
z Work Culture of the Organization etc.
Market share, Goodwill and Brand Value of the Bank are based cma.psrprasad@gmail.com