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Mergers in the finance space – national and international

Today, thanks to the Covid-19 pandemic and the Russia-Ukraine battle, the entire world economy is in shambles and quite disoriented. The logistics linkages are collapsing and free world trade is not operative thanks to multiple sanctions – effective or ineffective.

India already was having it’s own issues in the Banking and Non Banking Finance Companies (NBFC) space due to high levels of debts/lending which had gone wrong (doubtful of recovery) and the need to make provisioning due to failure of recovery of interest or principal instalments.

One of the ways of strengthening the financial entities is to bring in more capital into the entities.  However, our PSU banks are unwilling to raise money from the capital markets since they are worried about shares valuations and whether the market will be willing to invest in them.  Since years, no significant accretion to share capital of PSU banks has happened thru the capital issues route on the stock exchanges. The PSU banks have gotten used to the fact that the Govt of India as the largest majority shareholder will keep on pumping share capital to compensate their losses.

The only other option available in the Indian scenario is to merge the weaker PSUs into stronger PSUs so that the stronger bank can provide better management control and the weaker banks are facilitated in their monies recoveries.  Already, the merger route has been adopted with a certain level of success. However, we will need more mergers to reduce the numbers of entities and strengthen them. The other option of outright sale of the bank does not seem to have much success potential because the entire world has been gripped by recessionary tendencies thanks to the pandemic and the War in Europe.  At such times, getting a fair valuation of the entity becomes very difficult.

Mergers of PSU banks and private banks seems to be the only option available.  The HDFC Bank Ltd merger is a clear indication of what is the future path and direction. India needs to improve the health of it’s co-operative banks also, many of which are on the downward slide. The GOI and RBI will need to find out a way of handling merging of entities such that the combined entity is adequately funded and can look at the future growth prospects. Being stationery is not an option at this point. One hopes that judicial intervention and delays will not be allowed to occur.

Internationally also, we will hear of mergers of big banks and financial institutions. All financial institutions are being pressurised by rising inflation resulting in higher interest costs resulting in less demand for loans and defaults in payments of interest and principal amounts. As countries face economic challenges, their credit ratings and ability to manage debt also goes down. Entities will need to become stronger to ensure their survival. In such cases, there could be geographical split and sale of business or there could be global mergers. In times of uncertainty, it seems that size does matter and a stronger values Balance Sheet could be a saviour. Already, all central banks are proceeding on the path of tightening of funds availability which will impact enterprises in those countries. Banks and financial institutions must have the muscle to absorb the shocks.



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Disclaimer

Views expressed above are the author’s own.



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