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The PSU banks merger debate is an emotive one. It spans over 40 years, going back to the Banking Commission report of 1972. The avalanche of troubled loans of over Rs 8 lakh crore has given a new impetus to consolidation moves. While resolution of troubled loans is important and urgent, consolidation motives need to go beyond that.
From a shareholders’ perspective, the motives are cost reduction, revenue synergies and risk reduction. Enhancement of market power, though one of the objectives in many mergers globally and in private sector, does not find favour with from politicians and regulators. Safety, efficiency, public interest and strategic issues are the main motivations for regulators.
Global experience Faster delivery of financial services and products under one roof at low cost, besides safety of the money transferred, are the main motivations from consumer perspective. A combination of these motives sustains a merger.
Globally, many or most of the mergers have not delivered the desired benefits. Hence, it is important that the first step shall be putting in place well defined, measurable and executable objectives. But most of the comments on the merger debate appear to revolve around creating larger banks on a global scale as an end in itself. The merger of Japanese banks in the 80s and 90s was driven by this large size motivation with disastrous results; Japan is still in the process of clearing the mess. Even if the top five Indian banks excluding SBI are merged, one gets an aggregate asset base of $470 billion and Commerz bank at 50th rank has assets of about $630 billion.
That these big banks are a regulator’s nightmare is another matter. Then is it business as usual for Indian banks? The answer is a definite ‘no’.
New economy Some of the contributory factors for this huge stock of troubled loans lie in faulty business strategies, and lack of depth and breadth in leadership in most of these institutions, which are unable to meet the complex and large demands of a growing economy like India’s. The operating and business models are sitting ducks.
PSU banks brag about huge customer base and vast branch network. But they suffer from abysmally low cross sell ratio, which is the number of products that banking customers use divided by the number of bank customers (less than 2 against global best of 8). They also have a high dormancy ratio of 10-30 per cent, or the proportion of dominant accounts to the total. Information systems, to say the least are ancient.
These issues need to be resolved, otherwise the remedy could be worse than the disease. In a sense, quality of loans is a reflection of the quality of entrepreneurship in the country and this root cause also needs to be addressed. Crony capitalism has its own share in the mess.
There are other models of consolidation, in addition to brute-force mergers. Most of these models emanate from the new economy where mergers have created significant value to shareholders and consumers. It is important for banks to engage with startups, including acquisitions in the areas of predictive analytics, e- commerce, digital payments, distribution, customer/merchant acquisition, aggregation, financial inclusion, and reach out to underserved markets.
Both in leadership and start up engagements, SBI could be a role model. It demonstrated that elephant can dance with grace and stability.
Counter-intuitive approach A think tank in UK has recommended splitting beleaguered RBS into highly inter connected but autonomous 130 small units with common back office functions. Interestingly, the motivations include reduction in cost, revenue synergies and proximity to small business and consumers. This may offer some lessons to merger bhaktas ! A counter-intuitive consolidation model.
It is not rocket science to relate manifestations like wilful default, moral hazard, high leverage, entrepreneurship deficit or crony capitalism and lack of clarity on basic purpose and risk. The four Cs – Character, Capital, Capacity and Clarity – ought to be central attributes for both lender and borrower.
Lack of political consensus and vehement opposition from trade unions have stalled mergers over time. Will this government be lucky this time around?
The writer was CMD, Corporation Bank. The views are personal
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