Retail customers including account holders of amalgamating banks are likely to get affected.
About a week ago the finance minister, Nirmala Sitharaman announced the consolidation of 10 public sector banks into four mega state-owned ones. Retail customers including account holders of amalgamating banks are likely to get affected.
In a merger, there is an anchor bank and an amalgamating bank or banks, where the latter gets merged with the former. For instance, in the consolidation that happened in April of 2019, Vijaya Bank and Dena Bank (amalgamating banks) were merged into Bank of Baroda (the anchor bank). In effect, the operations of Vijaya Bank and Dena Bank were handed over to Bank of Baroda.
Essentially, retail customers of the amalgamating banks are likely to get directly affected whereas customers of the anchor bank are not likely to face much change. However, shareholders of all banks involved in the mergers are bound to be impacted.
The mergers are expected to be complete by the end of the current financial year, say government officials. As per a news reports last week, Indian Bank expects to complete the merger with Allahabad Bank by March 31, 2020.
Deposit, Lending rates: No change. However, if you have a marginal cost of funds-based lending rate or MCLR-linked rate, it will change after the reset period. Also, if you book a new fixed deposit or take a fresh loan, the rate will be decided by the merged entity. Similarly, the savings account interest rate may change
Borrowers: Deposit, lending rates to be decided by merged entity
When a bank merger takes place, how does it impact an existing borrower?
For instance, those who took a loan from Dena Bank or Vijaya Bank how will their loans get impacted? Is their existing MCLR related loan still operational or will they have to switch to BOB following BOB's terms and conditions?
Virendra Kumar Sethi, Head of Assets & Mortgages, Bank of Baroda explains, "All MCLR linked retail loans are migrated to the MCLR of the amalgamated bank. In the case of Dena and Vijaya bank MCLR linked retail loan customers have migrated automatically to the Bank of Baroda MCLR, which in this instance was 8.65 percent as of March 2019. Pre-amalgamation the MCLR of Dena Bank was 8.80% and Vijaya Bank was 8.75 percent. Hence, customers of Vijaya and Dena benefited from the lower MCLR of Bank of Baroda." For customers of Bank of Baroda, there was no impact, but for Vijaya and Dena bank customers there was a positive impact by a reduction in MCLR.
Hence, post amalgamation there was only one MCLR of Bank of Baroda and all loans are now linked to that, which was automatic for loans already linked to MCLR of the erstwhile banks.
The loan rates may change as there may be a change in the composition of deposits and cost of funds of the combined merged entity, says Gaurav Gupta, Founder and CEO, MyLoanCare. He explains what could possibly happen with an example: For example Oriental Bank of Commerce (OBC) and United Bank of India (UBI) have been merged into Punjab National Bank (PNB). Home loan rate of Punjab National Bank as on August 31, 2019 was 8.5 percent, while they were higher for UBI at 8.65 percent and OBC at 8.70 percent. Immediately, there would be no change in the interest rate of home loan customers of UBI and OBC. However, the next reset date, PNB will give an option to customers of UBI and OBC to be at par with its existing home loan customers by increasing or decreasing the spread. So, in this case, given that PNB has lower interest rate on home loan, one can expect a decrease in spread for existing customers of UBI and OBC.
It is, however, not clear what will happen to the interest rates payable on loans taken by those who have loans running with the amalgamating banks as the MCLR rates are different for different banks.
Account number, customer IDs likely to change
- Account number: This will not change immediately. But if your bank has been merged with a bigger bank, there could be a change eventually and you could be allotted a new account number/customer id.
- You are likely to get a new account number and customer ID. Make sure your email address/physical address and mobile number is updated with your bank so that you receive official intimations on change of account numbers. Moreover, all your accounts will be tagged to a single customer ID. Let us say you have an account with Oriental Bank of Commerce and one at United Bank of India; the two accounts will be allotted a single customer ID.
- Cheque book/debit card: You can continue using your cheque book and debit cards. The bank will issue new ones in a year
Home branch: There may now be a branch that’s closer/farther to you, depending on the merged entity's decision.
Local branches and ATMs
Customers will have to deal with the branch rationalisation exercise. For instance, your existing home branch could shut shop if the new acquiring entity has its own branch in the same vicinity. Keep an eye on the new IFSC and MICR code applicable to your branch and account since you will have to quote it for funds transfer and other financial transactions.
A plus point is that hopefully the branch network would become larger so access to bank branches should become easier provided the merged entity does not shut down all branches of merging banks. For instance, the combined entity of Punjab National Bank, Oriental Bank of Commerce, and United Bank of India will become the second largest PSU bank in the country with the second largest bank branch network with 11,437 branches.
You may also get access to a larger number of ATMs in a manner similar to that of a larger branch network thanks to the combined entity.
- According to the FAQ section of Bank of Baroda's amalgamation page, "The combined entity has a network of close to 9500 branches , approximately 13000 ATMs across India. (erstwhile Vijaya Bank - ATMs approx 2000 & Branches approx 2050 , erstwhile Dena Bank - ATMs approx 1500 & branches approx 1850) . Customers can also choose from a broader suite of products & services." It also stated that, "You can use the ATMs of any of the 3 banks (Bank of Baroda, Vijaya Bank and Dena Bank), no ATM transaction charges will be levied."
Third-party details: If you have been allotted new accounts or IFSC codes, they have to be updated with various third-party entities: Tax department for refunds, insurers to get maturity proceeds, mutual funds to get the redemption amount and National Pension System, etc
- EMIs/ECS mandate: You may have to submit new forms online or through branches
- Re-submission of account details for auto-credits/debits
You would have given your bank account numbers and IFSC codes for various financial transactions - auto credit of dividends via ECS, auto-credit of salary, auto debit of various bills//charges etc. Unless these accounts are seamlessly merged into the financial system of the anchor bank, you would be required to change the details of your bank account given for these purposes.
Customers who are allotted new account numbers or IFSC codes will have to update these details with various third-party entities where they had earlier given details of their accounts in the amalgamating banks. These will include the income tax department for tax refunds, insurance companies to get maturity proceeds, mutual funds to get the redemption amounts and the National Pension System (NPS), among others.
A couple of years ago, when five associate banks of State Bank of India (SBI) were merged, IFSC codes and names of 1,300 branches were changed. The banking behemoth changed the names and IFSC codes of branches of the amalgamating banks located in major cities such as Mumbai, New Delhi, Bengaluru, Chennai, Hyderabad, Kolkata and Lucknow.
Another thing you will have to keep in mind is that the post-merger entity will have to honour all electronic clearing service (ECS) mandates and post-dated cheques. Make enquiries with your bank, fund house and insurance companies and issue fresh ECS mandates, if required. You will have to fill up the ECS mandate forms online or through your branches. In case of auto-debits for systematic investment plans (SIP), you may have to submit fresh SIP registration-cum-mandate forms. You will have to do the same for loan EMIs. Customers are usually allowed to use balance cheque leaves and existing cheque books for 6-12 months.
- Credit/debit cards issued by the merging banks may have to be exchanged for those of the merged entity at some stage although the former are likely to remain valid for the interim period or even longer to ensure no disruption in services.
Paperwork and keeping financial trail of fixed deposits made will increase a bit as these will be transferred into the merged bank.
Shareholders of all the publicly listed banks involved in the mergers will be impacted. Shareholders of amalgamating banks will be allotted shares of the anchor bank in a pre-decided ratio. How much the respective shareholders will be impacted will be known once the swap ratios are announced. Apart from this, the prices of the shares on the exchanges have already been impacted when the mergers were announced.
The finance minister has promised to attend to problems arising out of tech related systemic changes, including standing instructions for various credits that account holders receive. "We announced merger of banks only after factoring in the technology compatibility between them. systemic changes that we have to go through. We will ensure that the problem is attended to," Sitharaman said at a press briefing held in Chennai. She was answering a query on standing instructions given by account holders for refunds, electronic fund transfers and account numbers.
We will now have to wait and watch in the coming days as more details about these mergers are announced to see the actual impact it can have on account holders.
Source: Economic Times.