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Bristling with practical problems

Public policy in India has generally sought to move towards consolidation of banks ever since the Narasimham Committee-II recommended in 1977 the creation of four or five mega banks to take on international competition. However the idea has met with opposition not only from the trade unions but also from independent experts who contend that the costs of merger will far outweigh the benefits, especially when the process of amalgamation is dictated from outside and involves two unwilling banks. The United Progressive Alliance government in its first term vigorously advocated consolidation but achieved very little: the only merger of any consequence was the one that took place between the State Bank of India and the State Bank of Saurashtra, the smallest of its associated banks. The government now would like the initiative for amalgamation to emerge from the banks themselves. Finance Minister Pranab Mukherjee has said that the government-owned banks should look at consolidation as a serious option, with the government, as the majority shareholder, playing a supportive role.

Over the past two decades, the only successful bank mergers have been among the new generation private banks, driven by commercial considerations rather than through government intervention. With smaller staff and fewer branches, such banks faced fewer obstacles. In an entirely different category was the forced merger of the private Global Trust Bank with the government-owned Oriental Bank of Commerce. The move was initiated by the government to safeguard the interests of the depositors of the failing private bank and to avert systemic damage. Rationalisation of bank branches and manpower requirements are clearly the most daunting challenges to bank mergers, especially when two public sector banks are involved. Many of the significant strengths of the SBI’s associates in specific regions will be whittled down if they are merged with the much bigger institution. Besides, the entire SBI group is moving towards a common technology platform and is using a common logo. A merger could well compound the problems of manpower management and could create additional layers of bureaucracy. Experience across the globe has shown that a bigger financial institution need not be more efficient. Those like the Citigroup that have grown rapidly through inorganic means have fared worse in the recent crisis. Consolidation in the banking industry is a deceptively attractive idea that bristles with practical difficulties.

The Narasimham Committee-II recommended in 1997 the creation of four or five mega banks to take on international competition. The first paragraph of "Bristling with practical problems" (Editorial, June 20, 2009) gave the year as 1977.

A sentence in the first paragraph was ". the only merger of any consequence was the one that took place between the State Bank of India and the State Bank of Saurashtra, the smallest of its associated banks." It is "associate bank" (previously called subsidiary).

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