Banking Regulation Act, 1949

Section 5 (b) - Banking:

Means the accepting of deposits of money from the public for the purpose of lending or
investment, repayable on demand or otherwise, and withdrawal by cheque, draft, order or
otherwise

Section 5(c) - Banking Company:

Means any company which transacts the business of Banking [in India]
Explanation: Any company which is engaged in the manufacture of goods or carries on any
trade and which accepts deposits money from the public merely for the purpose of financing its
business as such manufacturer or trader shall not be deemed to transact the business of
Banking within the meaning of this clause

Merits of a Banking Merger:

1.​ A merger increases the capital base of the anchor bank. It also gives the bank access to
a larger pool of money, allowing it to make decisions relating to high lending
requirements
2.​ Since both assets and liabilities of all the banks in question are merged, acquisitions
help banks strengthen their balance sheets. It would ultimately help nullify the Non
Performing Assets (NPA) of smaller PSU banks in India
3.​ Mergers also expand the anchor bank’s customer base by bringing the merging banks’
clients under one umbrella
4.​ M&As help banks scale more effectively in terms of operations and efficiency. They help
fill technological and financial gaps, negating the need to build capabilities from scratch
5.​ Mergers add to the anchor bank’s products and services, giving customers access to a
wider variety of financial products in addition to the existing ones
6.​ Mergers create larger banks, which are better equipped to face global competition

What challenges to mergers in Banking mergers entail?

1.​ If there’s a need for capital after the merger, it would demand a relatively higher capital
infusion from the government
2.​ Taking weaker banks under its umbrella would expose the anchor bank to
governance-related issues
3.​ Unhappy employee unions of banks would cause strikes and other troubles
4.​ Since the smaller banks’ NPAs would be merged with the bigger bank, the latter’s
pressure to address them would increase
5.​ At the management level, the difference in perspective, if not addressed, can lead to
friction, leading to the downfall of the entire organisation
6.​ If the customers are not communicated timely about the merger and its objectives, they
may pull off, leading to a loss of business

How do the Banking mergers in India impact customers?

1.​ Existing loans would be transferred to the merged bank after the acquisition, and
 borrowers would continue paying the same EMIs
2.​ Products and services would be available in more branches
3.​ The rate of interest on investments and loans would remain unchanged, and their terms
would prevail
4.​ Your bank account number, customer ID, and IFSC code could change
5.​ The validity of an existing cheque book can change
6.​ Debit and credit cards issued by a merging bank would have to be exchanged with that
of the merged entity
7.​ Some of the existing bank branches would be shut in order to rationalise branches

RBI’s perspective take on PSU banks’ merger:

●​ In its latest Financial Stability Report, the RBI stated that merged public sector banks are
riskier than unmerged ones
●​ Using stock market indicators to measure systemic risk in the banking sector, RBI found
a decreased risk in the banking sector in 2021 compared to the first wave of the
pandemic
●​ The apex bank stated that the systemic risk posed by state-run banks was higher than
the private players
●​ While the merger of banks is supposed to help achieve greater efficiencies for the banks,
revitalise the banking system, and lighten the government’s burden of funding, the
effectiveness of the merger depends on how well it is implemented

Intent of the Legislature:

In a Conference at Gyan Sangam held at Pune for two days where changes were initiated for
the lending sector norms as led by PM Shri Narendra Modi, Finance Minister Shri Arun Jaitley
and the RBI Governor Shri Raghuram Rajan.
In the conference it was held that Consolidations however is not only the path to follow, but it
may structure the small Banks to infuse capital as well as to improve the records in the balance
sheets

Voluntary Amalgamation of Banking companies:

Section 44A of the Banking Regulation Act, 1949:
●​ Provides that no banking company shall be amalgamated with another banking
company, notwithstanding anything contained in any law, unless the scheme for
amalgamation has been placed in draft before the shareholders of both companies
●​ Approval of the scheme is required by means of a resolution of 2/3rds of the majority of
the shareholders present in either company, in a meeting specifically called for the
purpose of amalgamation
●​ Once this scheme has been approved in due compliance with the requirements, it should
be submitted to the RBI for sanction. Once sanctioned, it is binding on all the
shareholders the companies

However Section 44A (3) of the Act protects the rights of the dissenting shareholders who have
either voted against the scheme or have given notice of such opposition in writing. Reserve
Bank of India determines the value of shares to be paid to dissenting shareholders
In this regard the Madras High court has held that the provisions of the Banking Regulation Act
constitute a complete code in themselves on the amalgamation of banking companies

Section 44A and 44 B of the Banking Regulation Act, 1949:

start with a non-obstante clause and these are express provisions in derogation of the
Companies Act to the extent therein provided. Section 44B of the Act expressly provides that no
High court shall sanction a scheme of arrangement of a banking company and its creditors
unless the requisite certificate is issued by the RBI

RBI had issued guidelines in May 2005, which laid down various requirements for the process of
such merger including determination of the swap ratio, disclosures, stages at which the boards
will get involved in the merger process etc.

While sanctioning the scheme of Amalgamation ,the RBI takes into account the financial health
of two banking companies to ensure inter alia, that after the amalgamation, the new entity will
emerge as a much stronger bank

Compulsary Amalgamation of Banking companies:

●​ Section 45 of the Act is aimed at rescuing financially weak private sector banking
companies
●​ Historical reasons state that the failure of many banks between the year 1934-1960,
forced the government to come up with provisions for bank rescue
●​ Section 45 involves two step processes
1.​ First step - the RBI recommending to CG the imposition of moratorium on a bank,
when the RBI has good reason to do so
2.​ Secondly, pursuant to the imposition of moratorium, if RBI is satisfied it may
restructure the bank or merge the banking company into another banking
institution
●​ Section 45 provides for a bank to be reconstructed or amalgamated without the consent
of its members or creditors, with any other banking institution
●​ The scheme is in public interest & the depositors of the distressed bank or to secure
proper management of a banking company,or in the interest of the banking system

In case of a banking company in financial distress, which has been placed under the order of
moratorium on an application made by RBI to the CG, RBI can, for the foregoing reasons, frame
a scheme of amalgamation for transferring the assets and liabilities of such distressed banks to
a much better and stronger Bank
●​ Such a scheme framed by the RBI is required to be sent to the banking companies
concerned for their suggestions or objections including those from the depositors,
shareholders and others
●​ After considering the same, RBI sends the final scheme of amalgamation to the CG for
sanction and notification in the official gazette
●​ The notification issued for compulsory amalgamation under Section 45 of the Act is also
 required to be placed before the two houses of parliament
●​ Most of the amalgamations of the private sector banks in the post-nationalization era
were induced by the Reserve Bank in the larger public interest, under Section 45
●​ In all these cases, the weak or financially distressed banks were amalgamated with the
healthy public sector banks
●​ The overriding principles governing the consideration of the amalgamation proposals
were:
1.​ Protection of the depositor’s interest
2.​ Expeditious resolution
3.​ Avoidance of regulatory forbearance