As competition intensifies, size would matter for PSBs.
Public sector bank (PSB) consolidation was a hot topic in 2008-09. Mooted by the then Finance Minister P Chidambaram, the issue did not get the required thrust after he left the Ministry.
With him back in the saddle again, there is a growing expectation that the issue will come up on the government’s drawing board.
At the recent Bancon meeting, while addressing bankers, the Finance Minister again raised the issue of PSB consolidation.
The emerging scenario is also turning favourable to the process of consolidation. Mounting pressures to issue new bank licences, which will induce enhanced competition from foreign banks getting full bank licences, and entry of a new set of private sector banks, will also precipitate the PSB consolidation.
The Reserve Bank (RBI) has already set the process of new licences in motion by approving the Dutch banking major Rabo Bank’s application for a full banking licence. Goldman Sachs was also given a licence to undertake primary dealership business in debt a few months back.
Big Fish
The biggest whale in the Indian banking waters, State Bank of India, is considered to be small fry in the global banking ocean.
Despite cornering about 25 per cent of the banking business in the country, SBI is ranked 60th in the list of Top 1000 Banks in the world by The Banker in July 2012. Ideally, India should have 4 or 5 global-scale banks.
Recently, the government is said to have asked SBI to do a detailed cost-benefit analysis of its merger with its five associate banks. The bank not facing any tangible problem in merging two of its subsidiaries earlier might have worked as a trigger.
Once all its subsidiaries are merged with it, it would be among the top 10 banks in the world in terms of various parameters.
Grapevine has it that recently the Ministry of Finance called the chairmen of SBI and BoI on the issue of merger and if this were to happen, SBI will become the fifth or sixth largest bank in the world.
With the advent of new century, Indian corporates are spreading their tentacles by acquiring companies abroad. For funding cross-country acquisitions Indian banks should acquire size and sophistication. Thus, there is no substitute for consolidation in PSU banks.
Pros and Cons
Despite the fears raked up by the happenings to large banks in the US and Europe, that proved the hypothesis that ‘big banks cannot fail’ wrong, there are some clear advantages that large banks enjoy. Bigger banks would be in a position to take advantage of efficiencies of scale, scarce talent could be utilised more fruitfully than in a smaller bank, better exploitation of brand equity and capital utilisation.
By experience, one can say that the larger the balance sheet you working on, more is the ability to weather economic ups and downs.
Most of the other ticklish issues coming in the way of mergers can be sorted out very easily today than four years back.
The big issue in bank consolidation then was the interface for various information technology (IT) platforms used by different banks.
Now, that is a non-issue. Most of the banks have integrated operations with Core Banking Solutions (CBS) in place, and most of these platforms are capable of talking to each other. The same is the case with ATMs.
The Department of Financial Services has worked to make PSBs become clones in terms of technology, standardisation of manpower recruitment, accounting practices, and most chairmen of PSBs are working in tandem with the advice of the Banking Division on these issues. And therefore, it would be easy for consolidation.
Human resources issues have also been smoothened with the same salary and perks structure adopted across PSBs. PSBs, having added 1.8 lakh personnel to their ranks over the previous year, are in a position to accommodate the surplus staff in the wake of mergers rather fruitfully in different roles.
Some of the overlapping branches can be converted into offices for specialised services. Even cultural issues are passé, with many employees prepared to work in areas far away from their native place.
Hierarchy issues at the top management can be handled by following the pattern adopted by State Bank of India.
The high level personnel could be accommodated at the senior levels of the merged entity by splitting the positions of the chairman and managing directors, the executive directors of merging banks could be appointed as deputy managing directors. However, the process may call for making some amendments to the Banking Companies (Acquisition and Transfer of Undertaking) Bill.
Permutations, combinations
The first question that arises after initiating the process of consolidation is who would be the predator and who would be the prey.
It should be based on a clear criterion. In the process of preparing PSBs for Basel-III guidelines, which seeks to raise the tier-I capital to 9 per cent from 8 per cent now, the government is expected to recapitalise banks to the tune of Rs 15,000 crore.
If the mergers can address this issue and give some relief to the government, it would be an added advantage, besides ensuring other synergies in scale of business, even geographical spread (branch concentration) and lower NPAs of the merged entity.
In the process, some weaker banks must be able to find some strong banks in alliance, besides it should improve the return on investment (RoI).
The following are some combinations for undertaking consolidation of PSBs, in the light of these parameters:
SBI, BoI and BoB — To be among the largest banks in the world
Canara Bank, Indian Bank, BoM, IOB and United Bank of India — To be the second largest bank
PNB, Vijaya Bank, Andhra Bank and IDBI — To be the third largest
Allahabad Bank, Central Bank, Corporation Bank and P&S Bank — To be the fourth largest
OBC, Syndicate Bank, UCO Bank and Dena Bank — To be the fifth largest
(The author is Chief Advisor, ‘Banking Law’, PDS & Associates, and former CMD of Corporation Bank)
Comments:
It has been seen in EU & US that the legend 'too big to fall' is a vague concept for banking industry.Although with CBS now consolidation is easier to implement and cost effective and BASEL 3 demands strong banks,before doing so the evils of consolidation may be examined in the light of experience stated at the beginning.
A serious issue that needs informed public debate. Recently, govt.
made seven groupings where smaller banks were assigned to bigger 7
banks. It looked like an ‘arranged courtship’. These days we are
hearing from the west a new phenomenon called ‘too big to fail’ What
will the impact of such a concern if we also just for aping the west
consolidate our banks to make them bigger with all the NPAs. Also,
take the current proposal in the article of SBI plus BOI. What was the
criterion in making this pairing. Why not any other bank like PNB.
The rationale for such mergers needs to be known. Also, see the
stagnation of the merger of just two airlines. Will the Dept. of
Financial Services play an active role or merely be a fifth wheel
ordering about the banks. Also will the political leaders use their
position and talk to labour leaders and ensure their active
participation without opposing the move. (continues)
As one from another branch of financial services, let us dust out from
the archives how the Congress ministers in the fifties successfully
merged the 243 private insurance companies varying in every aspect into
a single LIC in just about four years..That continues to be a classic
case of excellent coordination between the political leaders-civil
servants, regulators, industry officials and above all the employees and
their unions. If you thi nk of consolidation among npublic sector
banks, what about the consolidation of public sector general insurers.
The main HR question i would like to ask behind the merger of banks is
what about the employees of the bank who are merged into a bigger
bank. I work in one of the BIG banks which has merged 2 small banks in
the past. The ill treatment made to the employees of merged bank is
reflected in various HR policies. Recently in the promotion policy
"the years of service of BIG bank employees were counted each but 3
years of service of merged bank employees was counted as 1 year." If
this is the kind of treatment merged bank employees will get then
there will be animosity among banking employees.
And Mr.Chindambram, What about the wage revision of bank employees. We
bankers work day in and day out to meet targets,selling gold
coins,selling 3rd party products,conducting examinations,depositing
tax,etc the working peripheral is endless but we are paid the lowest
in industry. Im a clerk,working in PSU bank & get only Rs-12000/-
while a peon in state/central govt. gets better wages without work!!!
The point that Mr. Sagar Gandhi ahs made is very valid indeed and to an
outsider it looks so unfair ajnd discriminatory. In fact, smaller bank
employees have been exepeireinced in the whole gamut of oeprations of
the bank while in the bigger banks generally most of the employes have
experienced in one aspect or anotehr of the abnking service. No wonde,r
such rpactices would cause trouble for the government in the move for
consolidation.
The urgency for Centre to satisfy the urge to start banks expressed by corporates in India and giants abroad before 2014 Elections is understandable. But further delay in comprehensive financial sector reforms may have long term adverse impact on the country’s economic development. This is the right time for the FM to open a debate for a consensus in the matter.
The Narasimham Committee(1991) visualized a structure for Indian Banking System with ‘three or four large banks that could become international in character; eight-10 banks with a network of branches throughout the country engaged in “universal banking”; local banks whose operations would be generally confined to a specific region and rural banks (including RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities’. As more than two decades have passed, there may be need to re-evaluate a suitable model.
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