PSU Banks merger: Is it really going to improve banking system?

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Recently, Finance Minister Mrs. Nirmala Sitharaman has announced that the Government of India has planned to merge government owned banks to create a few strong banks that can compete in the global arena.

Will this mega bank mergers help in increasing economy?

The bottom line is clear: to create banks of global level that can leverage economies of scale and balance sheet size to serve the needs of a $5-trillion economy by 2025. The jury is, of course, out on whether this strategy will succeed. Finance Minister Nirmala Sitharaman made the merger announcement an hour before the government released the data showing India’s economic growth had slowed to an over six-year low of 5 per cent in the April-June quarter.

“Having done two rounds of bank consolidation earlier, this is what we want to do for a robust banking system and a $5 trillion economy. We are trying to build next-generation banks, big banks with the capacity to enhance credit,” Sitharaman said, adding that scaling up would allow banks to have a lot more resources, and lending cost would come down. The government has no plans for any more PSB mergers. “For now, the final number is 12,” Finance Secretary Rajiv Kumar said when asked if the government wanted to merge more PSBs in future.

The government also announced recapitalisation to the tune of Rs 55,000 crore (out of Rs 70,000 crore budgeted for 2019-20). The plan for infusing the remaining Rs 15,000 crore into PSBs will be announced in the next few days. According to the plan, Rs 10,800 crore will be infused in four banks under the Reserve Bank of India’s PCA — Indian Overseas Bank (Rs 3,800 crore), Central Bank of India (Rs 3,300 crore), UCO Bank (Rs 2,100 crore) and United Bank of India (Rs 1,600 crore).

Kumar said the government was confident all these banks would move out of PCA as all of them would meet the required regulatory capital after recapitalisation. The PCA framework restricts a bank’s ability to expand its business.

Meanwhile, the Central Statistical Office (CSO) in its official release on Friday said that India’s quarterly GDP has come down to 5 per cent as compared to 5.8 per cent in the last quarter of the financial year. The figure stood at 7.8 per cent in the same quarter of the previous financial year.

Some speculated at the announcement coinciding with the release of GDP data. At five percent, the growth rate is the slowest in more than five years.

NPAs are piled up not because of small banks, but because of inefficient policies to do with NPAs. Hence, merger will not solve the problem of NPAs. But with increasing NPAs, small banks cannot give more loans, but with merger big banks can better deal with NPAs and may not have to stop giving more loans.

The biggest chunk of recapitalisation will go to PNB, at Rs 16,000 crore, followed by Union Bank at Rs 11,700 crore — the two anchor banks for merger. Bank of Baroda is set to get Rs 7,000 crore as capital and Canara Bank Rs 6,500 crore.

“It’s good, as the ability to service people and to deploy technology faster will improve. There will be cost rationalisation. We all are operating similar products and serving Indian clients, so putting together the strength helps,” Andhra Bank Managing Director and Chief Executive Officer J Packirisamy told Business Standard.

Now, there is more than required number of banks in many areas. For example, there is Andhra bank, State Bank of India, Bank of India, and Syndicate bank in a small town. After merger only one branch can replace all these branches. This will result in reduction of operational costs and improved efficiency.

Unlike the SBI merger, PSU banks merger may create more problems because of merging heterogenous banks. These banks have different policies and regulations. Merging different types of banks will lead to confusion and can further aggravate the present problems. Merger of banks is expensive. It is true to say that merger may result in years of administrative problems.

Even after the merger, there is no guarantee that the newly formed banks can compete in the global race, but the probability of success stands at 50% if statistics are to be analysed of such steps taken in other countries and by merging there will be as such no great loss according to the government.

Will it lead to the unemployment for the present employees of PSU banks?

This is the question going through the minds of millions of employees of SBI and its associates and Mahila Bank. The All India Bank Employees Association has already raised the red flag. But the Finance Secretary, Mr. Rajiv Kumar assured that no employee will be at a loss and the merger exercise would not lead to retrenchment. The key factors for the mergers were: technological platform, customer reach, cultural similarities, and competitiveness, Kumar added. In 2017, India had 27 PSBs, but the National Democratic Alliance government implemented two rounds of mergers in its previous tenure. One was the merger of five associate banks and Bharatiya Mahila Bank with SBI (from April 2017); second, Dena Bank and Vijaya Bank were merged with Bank of Baroda, which came into effect from April 1 this year.

On the other hand it was thought that there will be problems of synchronization. For example, after SBI merger, SBI didn’t extend the benefits available to employees in SBI branches to its associate banks like SBH. This resulted in protests by its employees.

How the government can contain the avoidable fall outs due to mergers? The government should place its representatives from the law department, corporate business, and also from RBI on the steering committee handling the merger process; the steering committee should identify the areas of differences and the related issues and resolve the same, before hand;

The Human Resources wing & Labour Laws departments of the government along with RBI should closely monitor the situations and ensure that the differences arising at every step are resolved and the combined strength of staff starts working as a single unit;

  • Leaders from different levels of the new organization need to be identified and trained to handle difficult situations, which might disturb the peace and harmony at the workplace;
  • Such an exercise should commence at a very early stage, so that, the staff fits into the roles without much push or pull;
  • The staff who are likely to lose their seniority or other perks, should be duly compensated; this would bring down the cases of heart burns and thereby reduce the number of ruptures at the work place, considerably;
  • The top management should ensure that the staff at different levels dovetail into the organizational structure with ease;
  • The reported cases of anomalies, injustices need to be addressed immediately, so that the merger process is a success.

In conclusion….

NPA problem may not be solved by the merging of PSU banks, but this will definitely result in cost efficiency and can reduce burden of operational costs for banks. To compete with the world, India needs more global level banks.

It was the Narasimham-II Committee in the late 1990s that recommended consolidation through a process of merging strong banks. The issue has been the proverbial bee in the bonnet of successive governments since then. What the committee also recommended was shutting down the weaker banks and not merging them with the strong ones as is being done now. But this is obviously not an option politically even for a government with a brute majority in Parliament. Investors are more likely to provide capital for strong banks rather than weak ones. This is the problem currently faced by medium to weak banks. On the other hand, strong banks like SBI are able to attract investments.

The biggest plus of the mergers is that they will create banks of scale — there are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand. Yet, this advantage of scale cannot be leveraged without adequate reforms in governance and management of these banks. To be sure, Ms. Sitharaman did announce a few measures to make managements better accountable to the board. But the key reforms to be made are at the board level, including appointments, especially of government nominees. These are often political appointees, with little exposure to banking. Surely, such practices need to be curbed as the definition of global banks is not just about size but also professionalism in governance. The government will also have to manage the fallout of unleashing four mergers simultaneously which is bound to cause upheaval in the industry. Would it have been better if these mergers had been done one by one? The future will colour the past.

-This article is brought to you in collaboration with Ayushi Dwivedi from FIMT School of Law, GGSIPU, New Delhi.

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