Bank mergers

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The mega merger of the Public Sector Banks (PSBs) announced on August 30 last by Finance Minister Nirmala Sitharaman is most significant for many reasons since the nationalisation of banks done almost 50 years back. The magnitude, the scale and ability to disrupt the status quo of the Public Sector Banks should have been worked out by the government on its drawing board before such a decision was taken. How far, the course adopted by the government, and the strategy that has been adopted will succeed or not is not known. Such strategies have been adopted in the past in many countries post World War II situations when the financial institutions were reframed and re-organised in both ways, splitting and merging banks of different sizes only to facilitate re-building the economy in successful manner. But the mergers of such a nature have been unknown in Indian sub-continent. In the past small mergers have taken place with some success only to save the public money and restore confidence of the people in the financial institutions. Or in some cases only the small banks in the cooperative sector have been merged with bigger scheduled banks only to save the smaller banks from going bankrupt due to lack of cash inflow. The thought process behind these announcements are clear that the ruling party wants to create banks of global level that can leverage economies of the scale and balance sheet size to serve the needs of a US Dollar 5 Trillion economy in the next six years, which is too small a period for such a restructuring. The question whether such an ambitious goal is achievable or not begs answers under the prevailing economic conditions in the country. The world over, mergers are driven by synergies – in products, costs, business, geographies or technology and the most important, cost synergies. While there may be some geographical synergies between the banks being merged, unless they realise cost synergies through branch and staff rationalisation, the mergers may not mean much to them or to the economy. This is the question which will test the government’s strategy. It is no secret that PSBs are overstaffed. There is also bound to be overlap in branch networks such as in the Canara-Syndicate Bank merger, especially in Karnataka and a couple of other southern States. Same will be the case with Punjab National Bank and Oriental Bank of Commerce, both have very strong networks in the north and the west. The success of these mergers, therefore, will hinge on how well these banks handle the sensitive issue of staff rationalisation. The All India Bank Employees Association (AIBEA) has already raised the red flag. Sight cannot be lost of the fact that it was the Narasimham Committee in the late 1990s that recommended consolidation through a process of merging strong banks. The issue has been under active consideration of successive governments since then. What the committee also recommended was shutting down the weaker banks and not merging them with the strong ones as is being done now. But this is obviously not an option politically even for a government with a brute majority in Parliament. The biggest plus of the mergers is that they will create banks of scale – there are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand. Yet, this advantage of scale cannot be leveraged without adequate reforms in governance and management of these banks. To be sure, Nirmala Sitharaman did announce a few measures to make managements better accountable to the board. But the key reforms to be made are at the board level, including in appointments, especially of government nominees. These are often political appointees, with little exposure to banking industry. Such practices need to be curbed as the definition of global banks is not only about size but also professionalism in governance. The government will also have to manage the fallout of unleashing four mergers simultaneously which is bound to cause upheaval in the industry. It would have been better if these mergers were done one by one? Sudden mergers can have long term ramifications which are yet to be gauged by the experts when economy is not strong and the growth rate is slow and all time low in the past one decade or so.