Bank Mergers — Set 5

Correct Answer: C. Reducing government stake to below 50%

• **Reducing government stake to below 50%** = the P.J. Nayak Committee (officially: Committee to Review Governance of Boards of Banks in India) recommended that government ownership in PSBs should be brought below 50% to allow true board autonomy and professional management. • **Other key recommendations** — the committee suggested creating a Bank Investment Company (BIC) to hold government stakes, abolishing the Banks Board Bureau structure, and giving boards full power to hire/fire CEOs. • It argued that government majority ownership created political interference in lending, appointment, and risk decisions — contributing to NPA build-up. • 💡 Increasing the number of PSBs is wrong — the committee pushed for consolidation, not expansion; abolishing the RBI is wrong — the committee had no such recommendation; nationalizing more banks is the opposite of what was recommended.

Correct Answer: D. Banking Regulation Act, 1949

• **Banking Regulation Act, 1949** = Section 44A specifically governs the procedure for amalgamation of banking companies — requiring shareholder approval (two-thirds majority) and final sanction by the RBI or Central Government. • **For PSBs** — nationalised bank mergers are governed by Section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, but the Banking Regulation Act remains the overarching framework. • No bank merger in India can legally proceed without RBI's approval under this Act, ensuring depositor protection and systemic stability. • 💡 Companies Act, 2013 is wrong — it governs corporate mergers generally but does not specifically cover banking company amalgamations; RBI Act, 1934 governs the RBI itself, not bank mergers; Negotiable Instruments Act, 1881 deals with cheques and bills of exchange, entirely unrelated to mergers.

Correct Answer: B. It usually deteriorates due to the absorption of bad loans

• **It usually deteriorates due to the absorption of bad loans** = when an anchor bank absorbs a weak bank, it inherits all its Non-Performing Assets (NPAs), which raises the combined NPA ratio and worsens asset quality metrics immediately. • **Real example** — when PNB absorbed OBC and United Bank in 2020, its gross NPA ratio spiked initially because both absorbed banks carried significant bad loans. • Over the long term, the anchor bank aims to recover these NPAs through better management — but the short-term deterioration is unavoidable. • 💡 It becomes zero is wrong — NPAs do not vanish during a merger; they are inherited; it remains unaffected is wrong — the balance sheet changes the moment merger is effective; it improves automatically is wrong — asset quality never improves automatically; resolution requires dedicated recovery efforts.

Correct Answer: B. Vijaya Bank

• **Vijaya Bank** = Vijaya Bank (Karnataka-based, strong in South India) and Dena Bank (Gujarat-based, weak due to high NPAs) were both merged into Bank of Baroda effective April 1, 2019 — the first-ever three-way PSB merger in India. • **Strategic logic** — Vijaya was a healthy bank, Dena was financially stressed; combining a strong + weak bank under a large anchor (BoB) balanced the risk while expanding geographic reach. • After this merger, Bank of Baroda became India's third-largest PSB by business volume. • 💡 Andhra Bank is wrong — it merged into Union Bank of India in 2020, not BoB; Syndicate Bank is wrong — it merged into Canara Bank in 2020; Corporation Bank is wrong — it also merged into Union Bank of India in 2020.

Correct Answer: B. United Bank of India (Kolkata)

• **United Bank of India (Kolkata)** = United Bank of India, headquartered in Kolkata, merged into PNB on April 1, 2020 — giving PNB a strong foothold in East and Northeast India. • **The full PNB merger** — it was a three-way merger: PNB (anchor, Delhi) + Oriental Bank of Commerce (Gurugram) + United Bank of India (Kolkata) — creating India's second-largest PSB after SBI. • United Bank of India was primarily active in West Bengal and Northeast states, complementing PNB's North Indian strength. • 💡 Andhra Bank (Hyderabad) is wrong — it merged into Union Bank, not PNB; Corporation Bank (Mangalore) is wrong — it also merged into Union Bank, not PNB; Allahabad Bank (Kolkata) is wrong — despite being Kolkata-headquartered, it merged into Indian Bank, not PNB.

Correct Answer: A. They are usually changed to new codes of the anchor bank

• **They are usually changed to new codes of the anchor bank** = after a merger, absorbed bank branches are re-mapped to the anchor bank's IFSC code format, typically within 6–18 months of the effective merger date. • **Customer impact** — old IFSC codes are kept functional for a transition period; after the cutoff date, any transactions using the old codes are rejected — so customers must update their records with payees and employers. • RBI and the anchor bank issue circulars well in advance notifying customers, account holders, and businesses of the IFSC code changes. • 💡 They remain same forever is wrong — IFSC codes are bank-branch-specific and must change to reflect the new owning bank's system; they are abolished is wrong — branches continue to exist under new codes, they are not closed; they become identical to the branch's pin code is wrong — IFSC codes and PIN codes are completely different systems.

Correct Answer: A. Merger

• **Merger** = amalgamation means combining two or more entities into a single entity; in Indian banking law, 'amalgamation' and 'merger' are used interchangeably — both result in one surviving bank absorbing the others. • **Legal usage** — the Banking Regulation Act, 1949 uses the term 'amalgamation' (Section 44A); RBI circulars and government notifications on PSB consolidation also use this term officially. • The key distinction: in a merger/amalgamation, one entity survives; in a consolidation, an entirely new entity may be formed. • 💡 Liquidation is wrong — liquidation means winding up a bank and distributing assets to creditors, the opposite of merging; privatization is wrong — it means transferring government ownership to private parties; nationalization is wrong — it means taking private entities into government ownership, again the opposite direction.

Correct Answer: D. State Bank of India

• **State Bank of India** = the Imperial Bank of India was nationalised and reconstituted as the State Bank of India on July 1, 1955, under the State Bank of India Act, 1955 — based on the recommendations of the All India Rural Credit Survey Committee. • **Why 1955** — the government needed a powerful, government-owned bank to extend banking to rural areas and support five-year plan financing; the Imperial Bank's existing 480-branch network made it the ideal vehicle. • SBI is today India's largest bank by assets, deposits, branches (~22,000+), and ATMs — a direct legacy of this 1955 transformation. • 💡 Reserve Bank of India is wrong — RBI was established in 1935 and nationalised in 1949, not formed from Imperial Bank; Bank of India is wrong — it was established in 1906 as a private bank and nationalised in 1969; Central Bank of India is wrong — it was founded in 1911 and nationalised in 1969, unrelated to Imperial Bank.

Correct Answer: D. Closure of overlapping branches

• **Closure of overlapping branches** = when two banks in the same locality merge, the combined entity often shuts one of the nearby branches to cut operational costs — reducing customer convenience, especially in rural and semi-urban areas. • **Scale of the problem** — after the 2020 PSB mergers, thousands of overlapping branches were identified for closure or relocation; customers who depended on a specific branch faced travel inconvenience. • This is particularly harmful for senior citizens, agricultural borrowers, and customers without internet banking access who rely on physical branch visits. • 💡 Introduction of new technology is wrong — this is a benefit, not a disadvantage; faster loan processing is wrong — this too is an expected benefit of larger, better-resourced banks; higher interest rates on savings is wrong — mergers typically do not raise deposit rates; if anything, reduced competition can lower rates.

Correct Answer: D. Narasimham Committee II

• **Narasimham Committee II** = formally called the Committee on Banking Sector Reforms (1998), chaired by M. Narasimham; it built on the 1991 Narasimham Committee I recommendations and focused on strengthening the banking system structurally. • **Key recommendations** — merging PSBs into 3–4 large international banks + 8–10 national banks + local banks; reducing gross NPAs to 3% by 2002; implementing capital adequacy norms more strictly. • Its recommendation of a three-tier banking structure (large global banks, national banks, local banks) directly influenced India's 2017–2020 PSB merger strategy. • 💡 Tarapore Committee is wrong — it dealt with capital account convertibility (1997), not banking sector reforms; Malegam Committee is wrong — it focused on microfinance institutions (2011); Khan Committee is wrong — it dealt with development finance institutions merging with banks.