Money & Banking

Why mergers between public sector banks remain a non-starter

NS Vageesh | Updated on January 23, 2018

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Unlike their private sector counterparts, top honchos of PSBs don’t get the needed tenure or opportunity to look at consolidation

Mergers between private banks have happened at regular intervals. Last week, Kotak Mahindra Bank completed all formalities for the acquisition of ING Vysya Bank. That not only helped Kotak leapfrog to the fourth place among private banks in terms of size but has also given it a strong pan-Indian presence.

At about the same time, a Finance Ministry panel recommended that smaller public sector banks get ready for merger with their bigger brothers. For anyone following the debate, it would seem that this is another trial balloon floated to prepare public opinion about the need and benefits of consolidation.

Public sector banks are 27 in number. From the time of the Narasimham Committee (1991), there has been talk of creating four global-sized banks and about a dozen large domestic banks.

Every one agrees there is need to build scale, consolidate capacity, avoid unnecessary competition and preserve scarce government capital for deployment in fewer banks.

No progress

Despite finance ministers of various political denominations floating the idea of consolidation many times, the issue has remained exactly where it was two decades ago — at discussion stage.

The matter came up once again at the Finance Ministry-convened Gyan Sangam earlier this year. The outcome was a damp squib since bankers decided it was not the appropriate time to discuss the issue in view of the difficulties faced by banks over non-performing assets and capital-raising.

The Government also deferred to the prevailing sentiment and said that it will not force mergers and that it was up to the bank boards to take the issue further. That completes the usual loop that finance ministers go through after first proposing the idea.

Why has it been so difficult to put through even a single merger in the public sector bank space — except when it has meant a forcible rescue operation mounted at the behest of the regulator?

Bankers in the public sector feel that they simply don’t have the time to take a long-term view as private bankers are often able to in matters relating to consolidation.

One reason why private banks such as ICICI Bank, HDFC Bank or Kotak have been able to put through mergers and grow has been the long tenure of the top management.

Chanda Kochhar, for instance, has been with the ICICI Bank and its parent ICICI right through the past two decades, as have some of her key officials.

In HDFC Bank, Aditya Puri and Paresh Sukthankar have been with the bank since inception in 1994. And Kotak too has retained most of its core team since the last two-and-a-half decades when it started as an NBFC.

The stability in tenure, long innings, and the reputation and personal stake of the top management at these banks have made a difference and enabled them to think long term.

Limited time

Public sector bank chiefs don’t get this opportunity. They usually get a three-year term, which again is varied across different banks.

They come into office after a long stint with another public sector bank. It usually takes a couple of months to get a hang of what is going on.

Then the focus is on undoing the ‘misdeeds’ of the predecessor and bringing some change to help the organisation cope with changing realities. This takes up much of the second and third years.

And before year three is over, it is time to stop taking decisions, cover the flanks and pack up.

A merger is the last thing on their minds when they have a dozen other problems to handle. There is no incentive to take ownership for a tough decision that involves people and which the CMD will not be able to see through fully in his/her tenure.

So, it looks as though for some more time, PSB mergers will be basically an intellectual pastime and a seminar topic.

One solution

If the government really wants the mergers to happen, then perhaps there is perhaps only one way. The Finance Secretary will just have to call two bank chairmen and ask them to get on with it.

That may not be a great advertisement for corporate governance and board autonomy and such other pious ideals. Given the current realities, expecting public sector bankers to do it on their own is asking for the impossible.

Published on May 04, 2015

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