Allowing market forces to work their way through weaker banks being acquired by larger ones, is one way of looking at consolidation.
Bankers’ conferences are a platform to flag new or flog old ideas. Last week’s meet at Pune saw Finance Minister P. Chidambaram using the opportunity to reiterate a pet theme of his – of the need for consolidation among Indian banks. We must create at least 2-3 banks of international size as the Chinese have done, Chidambaram noted, repeating what he had also been espousing in his earlier stints as Finance Minister. In fact, this issue has been flagged ever since financial sector reforms got underway with the opening up of the Indian economy in the early 1990s, receiving real prominence with the second Narsimham Committee on banking sector reforms in 1998. It recommended merger among large Indian banks, leading to a three-tier structure where there would be three mega banks with global presence, 8-10 national-level banks and a large number of regional and local banks.
But all these have clearly not moved beyond the realm of ideas. While there are as many as six Chinese banks among the world’s top 50 banks ranked by total assets, that list does not have a single one from India, including the venerable State Bank of India (SBI). Again, it’s not that no one has tried. A few eager beaver chairman of public sector banks did make half-hearted attempts. But the problem here has been two-folds. The first, of course, is opposition from the unions. The fact that mergers generate economies of scale, reduce unnecessary duplication of infrastructure, and help greater access to global funds and talent pools — thereby enhancing the ability to take on higher loan and investment exposures — is all too well known. But the possibility of their also creating labour redundancies, as the unions believe, has made it difficult for an SBI to merge even its associate banks with itself, leave alone take over other banks.
The second problem has to do with leadership. The average tenure of a state-owned bank chairman doesn’t exactly lend itself to grandiose plans, which includes mergers and acquisitions. During the 2-3 years they usually have, much of the time goes in just keeping one’s head above water and avoiding any kind of confrontational situations. That may possibly explain why the two banking institutions to have witnessed real growth over the past decades – ICICI and HDFC Bank – are both in the private sector and whose chiefs have had sufficiently tenures to conceive of long-term visions for their organisations and progress towards actually implementing them. As far as consolidation goes, the Government should certainly encourage the process by creating a supportive environment. That includes giving more time and space to its own bank chiefs, enabling them to think strategically. This conscious encouragement, sans any imposition by writ, can go hand in hand with allowing market forces to work their way, through weaker banks being acquired by the ones with larger size and reach.
Keywords: Banking and consolidation
Comments:
Financial sector has a vital role to play in the further and
accelerated growth of the economy. You have pointed out two reasons,
one the possible labour resistance and the second leadership issues.
While the first needs the vision, guidance and leadership by ministers
in dealing with labour issues and their role in convincing the labour
and supporting the management of the benefits of mergers and
consolidation, the second issue is well within our control. Why has
the govt. in all these decades, not been able to follow such a policy
as would enable choosing experienced and knowledgeable bank executives
who could provide leadership to their banks with sufficient time frame
left for them to fulfil their vision. While no doubt proposals for
merger has to come from within, note the recent decision of the govt.
to designate some seven big banks and allocate unto them a few smaller
banks each –reminiscent of Indian arranged marriages-and stipulating
that the CEOs and boards (continues)
CEOs and boards of these small designated banks must get the advice of
the CEOs of bigger banks to whom they have been ‘tied’ sound somewhat
anomalous and might if anything restrict even the existing freedom
and initiatives of individual banks This decision of the govt.
unfortunately has gone almost unnoticed leave aside being commented
editorially. Lastly, the experiences of the govt. also would play a
part in moulding public opinion. If in 1956, it was possible for the
political leadership, the civil servants and the industry to
successfully manage the integration of 243 private insurance companies
into a single LIC in a short time of four years, look at the recent
failure or stagnation of the merger of just two airlines. Lastly, the
current public worry is about the health of PSBs -due to mounting
NPAs.
One finds it ironic that the Finance Minister - and, implicitly, this newspaper - is encouraging consolidation of banks just a few years after giant private banks destroyed a large segment of the world economy. They earned themselves the name of being "too big to fail", resulting in trillions of dollars of public money being wasted on bailing them out along with their obscenely wealthy directors. Clearly, no one in India seems to have learned from this experience. A number of tightly regulated, smaller banks (with the majority in the public sector) is greatly preferable to a handful of large ones, with the risks of cartelisation, financialisation and speculative wastage that accompanies the latter.
The PSB strenght or weeknes depends upon the CMD who are just posted for less than two years. Every CMD tries his own policies thereby resuling in loss or profit to the Bank. Unless and until the PSB have CMD for more than three years it is worng to define PSB as strong and weak
Well. We need to agree. When our economy is growing, our financial institutions are also required to grow in size.We can have one consolidated State Bank (merging SBI and all other State Banks) We have already initiated action in this regard. This needs to move fast.We can have one National Bank (merging all Nationalised Bank). This way no nationalised bank will feel that their idendity is lost. Additionally - No employee will be asked to leave. All employees will have normal employment in the bank till their voluntary separation - Best HR policies and practices / best employee monetary benefit among the merging / consolidating banks will be made available to all the employees of the final entity - Employees can be given one additional increment in their present scale so that they will agree to this - Pension liabilities to be taken over by the new entities - New banking entities should plan for branch optimization initiative right from the beginning - During the next three to five years large number of bank employees of the individual banks would be retiring. This will provide the best opportunity for the new entitites to manage their manpower. Though I agree this will be a massive restructure initiative, it is very much required to ensure that our requirements for growth are taken care when we get into the top economies group in the near future.
I fully agree with Dr.Guru Raghavan that all the public sector banks,other than the state bank group,should be merged into one National Bank of India. It will ensure that the employees will not feel the stigma of joining another big brother institution after putting up years of service in his own institution. The employees often shudder at the prospect of joining another bigger bank where they are afraid of not receiving treatment on equal footing.
The creation of a National Bank of India will go a long way in dismantling the worst fear of the staff,though,other issues will remain still.
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