How Do Bank Mergers Affect Consumers?

The banking sector, either directly or indirectly, plays the most vital role in every consumer’s life. Increased non-performing assets (NPAs) and outstanding loans, as well as structural asset-liability mismatch and management governance difficulties, bring in the need for structural changes in the banking sector. In light of this – the central governments and State Governments begin the process of reorganizing public sector banks.

For Instance – Nirmala Sitaraman, the Finance Minister of India, announced the merging of ten Governments of India’s undertaking banks into four mega-banks in 2019. After the Merger – there will be 12 public sector banks, down from 18 previously.

However, owing to the economic lockdown, the government’s effort to recapitalize public sector banks could be severely hampered as bad loans increase and credit quality deteriorates.

What is a Bank Merger?

Bank mergers are not a novel notion in India. Bank mergers have been done in the past to change the financial sector. The plan to consolidate the banks would not only achieve financial inclusion goals but will also improve NPA and risk management.

Furthermore, because the Merger would boost the role of internal and market resources, Public Sector Banks (PSBs) will be less reliant on the government for capital.

Usually, a Merger is a process of combining the ownership of two or more separate business entities through a series of legal and administrative steps. More competitiveness and economies of scale arise from the combination. Furthermore, a company’s wealth, service diversification, and market share are all increased. A bank merger is a process of merging two or more formerly separate banks into a single entity. An independent bank loses its charter and becomes a part of an existing bank with unified control when it merges.

What Happens to a Bank’s Stocks After a Bank Merger?

The impact of a merger announcement on banking sector stocks in India will vary depending on the deal’s terms, as well as market opinions of the transaction’s worth and the likelihood of completion.

If the Merger is completed through a stock exchange, the exchange ratio will determine whether one of the firms would receive a premium above its share price before the agreement is announced. That company’s stock may grow, but that rise could be limited if the stock price of its merger partner falls, diminishing the original premium.

Some mergers may include a collar agreement that increases the exchange ratio if the stock to be swapped falls below a specified level, limiting the danger of such erosion. Collars like these limit one company’s downside at the expense of its merger partner and that company’s stockholders, but they’re less prevalent in mergers of equals or near-equals.

The market may also discount the proposed merger premium if the deal faces significant potential roadblocks, for instance, in terms of regulatory approval. Conversely, shares of a company could trade above the proposed merger premium if investors believe the deal announcement may prompt higher bids from new suitors.

When a firm announces that it will acquire another, the target company’s stock often rises (approaching the takeover price), while the acquiring company’s stock may fall slightly to account for the purchase price. If the market perceives a merger to provide synergies that benefit both the acquirer and the target, both companies’ stock prices may rise. If the market views the transaction as a folly, both stock values may collapse.

Why Do Banks Need Mergers?

• In recent years – Our country’s banking system has faced numerous issues. The need for a banking merger arose as a result of the following factors:
• The growing role of PSBs in providing loans to farmers, capital-intensive riskier sectors like steel and cement, and regular loan waivers by the government are wreaking havoc on India’s credit culture.
• Non-performing assets (NPAs) have been a source of concern for the banking industry. It has had a significant impact on bank credit distribution.
• India’s poor economic predicament has been exacerbated by the twin balance sheet problem. The term “dual balance sheet problem” describes the strain on a bank’s balance sheet caused by non-performing assets (NPAs) on the one hand and severely indebted corporates on the other.
• Other challenges such as long project gestation periods, a lack of timely environmental approval for projects, a lack of adequate business analysis prior to loan disbursement, and the country’s poor debt recovery architecture exacerbate PSB problems.
• Political interference in PSB operations is a major source of worry. It affects the efficiency of the bank.

These risks must be addressed by banks to improve their capital bases. Mergers and acquisitions are one way to accomplish this. One of the remedies for the faults of the Indian banking system is bank mergers.

What do You Need to do If your Bank has Been Acquired?

Customers with CDs and mortgages should not be concerned about a bank merger. Unless federal regulators force a merger due to a bank failure, the CD rate and terms stay in effect.

A CD is a contract with a fixed rate. It’s a legal obligation that comes with a purchase. They can’t terminate the contract in the middle of it. Mortgages are the same way. Your agreement with your prior bank is not affected by a merger. All those legal liabilities are transferred to the acquiring bank.

One of the reasons banks merge is to increase their customer base and geographical reach. Banks prefer to keep customers rather than lose them. Keep it in mind if you have any troubles throughout the merging. Existing accounts and products will often remain unchanged as long as an agreement’s conditions remain in effect.

A merger is a perfect period to consider whether you should move banks or look for one where you may create a new account and spread your money out so that more of it is protected.

Consider what’s important to you, whether it’s branch access, competitive APYs, a diverse product offering, a feature-rich mobile app, or a worldwide bank versus a community bank. Examine the fees and the required minimum balance.

Conclusion

Consumers will be affected by bank mergers – that is a given. You can expect new account numbers and bank routing numbers, changes in fees, and much more. This is why you have to be on the lookout before this could happen and also make the right decisions after.