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In News
- The Reserve Bank of India (RBI) released a draft scheme of amalgamation of fraud-hit Punjab and Maharashtra Cooperative (PMC) Bank and Delhi-based Unity Small Finance Bank.
Major Highlights
- Unity small finance bank:
- Unity SFB is a joint venture between Centrum Group and BharatPe.
- It commenced operations as a small finance bank (SFB).
- Unity SFB is being set up with capital of about Rs 1,100 crore as against a regulatory requirement of Rs 200 crore for setting up a small finance bank under the guidelines for on-tap licensing of small finance banks in the private sector.
- Draft scheme of amalgamation:
- According to the draft scheme of amalgamation, following the amalgamation, depositors of PMC Bank will get their money back over a period of 3-10 years.
- According to the scheme, deposits of up to 5 lakh can be claimed by depositors over a period of three to 10 years.
- The RBI said the entire remaining amount will be paid after ten years.
- Further, the central bank has clarified that interest on these deposits shall not accrue after March 31, 2021 for five years.
- Significance of this merger:
- The takeover of assets and liabilities of PMC Bank, including deposits, by Unity, will give a greater degree of protection for the depositors.
What is a Merger of banks?
Objectives of a merger
Why do Banks Merge?
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Advantages of Merging Banks
- The merger will reduce the cost of banking operations.
- Merger will help in improving the professional standards.
- Provides a better efficiency ratio for operations as well as banking operations which is beneficial for the economy.
- Multiple posts get abolished, resulting in substantial financial savings and banking mergers improve risk management.
- The merger helps the geographically concentrated regionally present banks to expand their coverage.
- After these mergers, the lending capacity of the Public Sector Banks will increase and their balance sheet would also be strong.
- These big banks would also be able to compete globally and increase their operational efficiency by reducing their cost of lending.
- The merger would help in better management of banking capital.
Disadvantage of Merging Banks
- Acquiring banks have to bear the burden of weaker banks.
- Very challenging to manage the people and culture of different banks.
- Large banks are more vulnerable to global economic crises.
- Mergers may make it difficult for private banks to gain faster market share as most anchor banks are large.
- It also destroys the idea of decentralization as many banks have a regional audience to cater.
- Other issues includes:
- Chances of a Bank going Bankrupt.
- No past experience
- Risk of fraud and robberies.
- Risk of public debt.
- Strict assessment.
- Complications.
- Governance issues.
- Financial aspects.
- Need of collateral.
Way Forward
- India needs investment in huge quantities to turn India into a 5 trillion economy. If banks have sufficient money to fund big projects then the economic development of the country would speed up.
Source: IE
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