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)

(This article was published on December 17, 2012)
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