In an endeavour to create global-sized institutions, the Government of India is encouraging the consolidation of public sector banks. This is for the purpose of reducing their number, as also making way for bigger banking institutions.
To achieve this, the Government is looking to act as a mediator to merge state-run Bank of India, UCO Bank and Indian Overseas Bank with stronger entities. Such merger ideas are not new and the country’s largest bank – State Bank of India (SBI) too – is considering merging Bharat Mahila Bank and its five associate banks (the State Bank of Bikaner and Jaipur, Mysore, Hyderabad, Travancore and Patiala) with itself.
This spells good news for the economy as a whole, as it implies higher growth, given that a larger bank provides the requisite backing required to fuel this very growth. However, the question on everyone’s mind is what this move implies for the common man. The following are some aspects to be considered in this regard:
Loans
In the event of a merger, all existing assets and liabilities are transferred to the acquiring bank. Thus in the case of loans, a borrower has to continue paying EMIs to the acquiring bank. So like in the case of the SBI merger, an individual who has borrowed in the past from State Bank of Hyderabad, for instance, will have to continue paying the EMIs due, to SBI.
Since loans are like contracts, they will continue with the original rates of EMIs till the next reset date. The reset date depends on what the borrower had opted for under the Marginal Cost of Funds-based Lending Rate (MCLR).MCLR is affected by multiple factors including CRR (cash reserve ratio), the interest rate offered by bank on deposits (bank’s cost of borrowing), operating expenses to run the bank and the bank’s profit margin. An increase or decrease in any of these would lead to a corresponding change in the MCLR and by extension to the interest charged by the lender on loans offered by it.Therefore, subsequent to a decrease in CRR by RBI, many banks have lowered their interest rates on home loans.
Those loans linked to the Base Rate (BR) will thereafter be linked to SBI’s base rate, and those linked to MCLR, to SBI’s MCLR rate. Customers will also be able to shift from BR to MCLR if they like. At present, the associate banks of SBI offer higher rates as they are competing with other banks.
If the lending rate increases post-merger, then customers can have the loan refinanced elsewhere if they get a lower rate. Customers would have to compare costs when it comes to shifting their loan as they would have to pay legal and processing fees, etc. If these additional charges and the interest rate levied by the new lender are higher, then it might not make sense to shift to a new bank.
Customers might also benefit from lowered rates, if the lending rate goes down, after the merger. When it comes to loans, customers will mostly benefit in the case of the SBI merger, as SBI generally charges lower rates, as depicted in the table below:
|
BANK |
PERSONAL LOAN % |
HOME LOAN % |
CAR LOAN % |
|
State Bank of Hyderabad |
N/A |
9.7 |
9.9 |
|
State Bank of Mysore |
16.85 |
9.85 |
10 |
|
State Bank of Bikaner & Jaipur |
13.05-14.05 |
9.55 |
9.7 |
|
State Bank of Travancore |
13.1-13.85 |
9.85-10.1 (rate for loans above Rs.75 lakh) |
10.35-10.6 |
|
State Bank of India |
12.55-15.05 |
9.45 |
9.8 |
Source: Rates displayed are as per information available on Banks’ websites
Savings Accounts
If there is a difference in the savings bank rate, the rate that is currently enjoyed by the customer would have to be provided to customers. In the past, there has been a case where customers of ING Vysya Bank got 6% for their savings accounts when ING Vysya Bank merged with Kotak Mahindra Bank, since that was the rate provided by Kotak. Once the actual process of working out the structure of the merger, the products offerings and the changes wrought by the merger will be better defined.
Fixed Deposits
Since fixed deposits are akin to contracts, banks will not be able to change the rate mid-way, after the merger. Thus, for those customers who have an existing long-term fixed deposit with their current bank, it can be continued till the maturity period. However, there could be exceptions, in the case of high-value fixed deposits.
Debit and Credit cards
The rules governing the minimum balance, features, fees, and terms and conditions ofdebit and credit cards will change. However,and the extent of changes will be determined over a course of 6-12 months.
Third-party products
In the case of third-party products which are sold through banks (bancassurance channel)such as mutual funds and insurance, the insurance provider or mutual fund house is responsible for servicing the customers directly. Such bancassurance channel operations are expected to remain unaffected by any changes in the structure of the banking institution such as a merger.
Bank information
Customer information such as bank account numbers and Demat account numbers are most likely to change. Customers should ensure that they check these aspects, as also acquire the new cheque books issued with the name of the new bank, and new account details. If customers are currently paying EMIs or SIPs for investments, or other utility payments where the amount is directly debited from their account at a stipulated time, they should ensure that they notify the relevant parties about the change in information.
In Conclusion:
The merger of weaker banks with larger and stronger entities would definitely help the public sector banks compete much better with the leading private sector players. Additionally, these mergers would also help the public sector banks build greater economies of scale for their operations, which may be passed on to customers leading to further lowering of loan interest rates. Additionally, through such mergers, the smaller banking entities are expected to have greater access to funds to improve their infrastructure and keep pace with the changing needs of the industry.