The Origins Of The Great Indian Bank Merger

Last week, the Government of India decided to merge 10 more public sector banks into four groups. This is the second merger of public sector banks in recent times, after Vijaya Bank and Dena Bank were merged with Bank of Baroda. That amalgamation had offered the opportunity to study the history of mergers and closures of Indian banks, which date back to the 19th-century. This most recent move is the widest rearrangement of the banking sector since the nationalisation of 14 banks in July 1969..Banking Mergers Since 1969.In the 50 years since nationalisation to this most recent round last week, India has witnessed 53 mergers, mostly that of failed banks being merged with good banks. While we have seen mergers every decade, there’s been a sharp jump in recent years..16 mergers have been announced in the last 20 months, that is between 2017 and 2019..Of the 53 banks merged since 1969, 12 were merged with SBI (seven were SBI Associates), followed by five each with Bank of Baroda and Punjab National Bank..Why PSU Bank Mergers Won’t Solve Indian Economy’s Most Pressing Problem .Journey From 1969 Nationalisation To 2019 Mergers.Of the 14 banks that were nationalised by Prime Minister Indira Gandhi in 1969, 10 retain their identity 50 years down. Gandhi pushed through the nationalisation after assuming the Finance Ministry portfolio following the resignation of Morarji Desai, who was opposed to the move. Another skeptic of nationalisation at the time was IG Patel, then the economic adviser in the Finance Ministry..Eleven years later, the roles reversed. In 1980, six more banks were nationalised, also by Prime Minister Indira Gandhi but at the behest of IG Patel, who was then the RBI governor. This time it was the PM who was not sure about the nationalisation, but agreed to it as the proposal came from the RBI governor. Patel explained the rationale in his book..Vijaya Bank and Punjab & Sind Bank had become the personal fiefdoms of individuals who disregarded all rules and advice with impunity. They, with their shady dealings, were offering unfair competition to nationalised banks. I decided that the only way to tackle the problem was to nationalise the banks which had reached the cut-off point of the 1969 Act.IG Patel, Glimpses of Indian Economic History.In the intervening three decades since 1980, the league table (by size of deposits) of the nationalised banks has largely remained stable. Two banks make it to the top dozen in 2019 that weren’t so in 1980. Bank of Maharashtra was the 15th largest in 1980 and has moved to the 11th spot. Punjab & Sind Bank was 17th, and now stands at 12th..Public Sector Bank Mergers: The Real News Is Elsewhere.History Of The 10 Banks Being Merged In 2019.Now, the number of nationalised public sector banks will go down to 12 following Finance Minister Nirmala Sitharaman’s announcement, from 27 in 2017..Punjab National Bank + Oriential Bank of Commerce + United Bank of India.The merger of Punjab National Bank, Oriental Bank of Commerce and United Bank of India brings together three banks whose origins lie outside present-day India. PNB and OBC commenced operations in Lahore and moved their headquarters to Delhi just before partition. United Bank of India’s roots are in what is now Bangladesh..PNB is seen by banking historians as the first Swadeshi bank which was established by Indians in 1894. .The freedom fighter Lala Lajpat Rai sent a circular to his friends insisting on an Indian joint-stock bank. Punjab National Bank had a stellar board as its first directors, with leading educationists, lawyers, industrialists and merchants..Oriental Bank of Commerce was established by the educationist Rai Bahadur Sohan Lal in 1943..Meanwhile, here’s how United Bank of India came to be. In 1950, Nath Bank, which was a major Calcutta-based bank, failed. This lead to to runs on banking companies in the region. As a result, four banks: Comilla Banking Corporation, the Comilla Union Bank, Bengal Central Bank, and the Hooghly Bank merged, and the new entity was called United Bank of India. The merger was driven by NC Dutt and his son BK Dutt of Comilla Banking Corporation, which was founded in East Bengal in 1914, now Bangladesh. By the time of its 1969 nationalisation, United Bank had become the eight largest bank in India with most of its branches in the eastern region..Canara Bank + Syndicate Bank.The banks that form the second merger, Canara Bank and Syndicate Bank, share an interwoven history from the South Canara region of Mangalore and Udupi. Both were formed by leaders in the Gaud Saraswat Brahmin community, which has lent its banking expertise to several banks over decades..Syndicate Bank started as Canara Industrial and Banking Syndicate and competed strongly with Canara Bank. The Pai family which founded Syndicate Bank has also been the force behind making Manipal a hub for education and healthcare..Between 1949 and 1960, both these banks merged 27 banks into their fold, showing strength at a time when banks elsewhere were failing..The South Canara region’s banking sector enjoys an enviable track record. Corporation Bank (which is now in the third merger group) was earlier called Canara Banking Corporation. There were talks in the early 1960s to merge these three ‘Canara banks’ into one large Canara Bank, but this did not fructify. The RBI was asked to intervene as well, but the regulator declined, saying it was an internal matter for banks to decide. Vijaya Bank (merged with Bank of Baroda last year), and Karnataka Bank were founded in Mangalore as well..Sadly, after the latest round of mergers, only one – Canara Bank – will retain the identity of a region which takes so much pride in its local banks which grew to become national-level banks..Union Bank of India + Corporation Bank + Andhra Bank.The third group of merged banks were all established under the Swadeshi spirit..Union Bank of India, which is in its centenary year was founded by Seth Seetharamji Kisondayal Podar in Bombay right after World War-I.Corporation Bank was started by the philanthropist Haji Kasim Saheb in 1906 but was later governed by members of the GSB community as its founder went into debt troubles, and died broke in 1935.Andhra Bank was founded in 1923 by the freedom fighter Bhogaraju Pattabhi Sitramayya in the coastal town of Machilipatnam. It shifted headquarters to Hyderabad in the 1970s. Andhra Bank was close to being nationalised in 1969, but missed the threshold of Rs 50 crore by a small amount..Indian Bank + Allahabad Bank.Allahabad Bank was founded in 1865 by Europeans in the city that it get its name from. It has the distinction of being the second-oldest modern bank in India after the State Bank of India, which started as Presidency Bank in Calcutta in 1806. In 1920, Allahabad Bank was acquired by P&O Bank which was the banking arm of the British shipping company P&O Group, which shifted Allahabad Bank’s headquarters to Calcutta. P&O Bank was, in turn, bought by the Chartered Bank of India, Australia and China which operated Allahabad Bank as a separate entity. In 1969, the same year that Allahabad Bank was nationalised, Chartered Bank globally merged with Standard Bank, to form the present-day Standard Chartered..Indian Bank, on the other hand, started as a purely Swadeshi enterprise after the failure of Arbhutnot bank, a major British bank based in Madras. This prompted Indian nationalist and lawyer V Krishnaswamy Iyer to establish Indian Bank with the support of the Chettiar community..Incidentally, Indian Bank was established on August 15, 1907, exactly 40 years before India’s independence..Bank Mergers Are No Silver Bullet for India.2019 Mergers: Roots In 1991 Narasimham Committee?.In a way, the government is following the recommendations made by the M Narasimham Committee in 1991. The committee had proposed that the Indian banking system evolve as following:.Three or four large banks (including the State Bank of India) which could become international.Eight to 10 national banks with a network of branches throughout the country.Local banks whose operations would be generally confined to a specific region.Rural banks (including RRBs) for rural and agricultural activities..These recommendations were implemented in a piecemeal manner as is the case with most such reforms. Some local banks came up, but the idea barely took off. The principle of focussing on a specific region has been removed for small finance banks..As for the first two recommendations, the Narasimham Committee had asked the government to reduce the number of public sector banks and open the space for private sector banks..Successive governments focused mainly on the latter while ignoring the former..The new private sector banks also played a role in the delay. Some of the new entrants of the 1990s closed soon after inception, with a few also responsible for fraud. This required a cleaning up of new private sector banks..Over time, the remaining new banks have largely been stable and have increasingly taken the share from public sector banks. With public sector banks performing poorly off late, it was perhaps time to move back to the ignored suggestions of the Narasimham Committee..Amol Agrawal is a faculty member at Ahmedabad University. He has a PhD in Indian Banking History and writes the Mostly Economics blog.The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.

The Origins Of The Great Indian Bank Merger

The journey from the 1969 nationalisation to the 2019 mergers, and the history of the 10 banks now being merged. By Amol Agrawal.

Choose a plan