Challenges galore

Consolidation of public sector banks

May 04, 2015 01:30 am | Updated 01:30 am IST

The talk of consolidating the 27 largely disparate public sector banks (PSBs) is once again in the air. A recent report by a finance ministry- appointed panel has suggested that the smaller PSBs could be merged with the larger ones. After the merger, the number of PSBs will naturally come down, but the government-owned banks will emerge stronger. That at least is the hope.

The idea of bringing about consolidation among government-owned banks is deceptively attractive, but bristles with a number of difficulties. Nor is it a new idea. As far back as early 1990s, the Narasimham Committee on financial sector reforms had recommended it. Several finance ministers had espoused the idea publicly.

Taking a cue from their political masters, some bank chairmen had talked of a merger among them at varying times. But like committee recommendations and finance ministers’ wish lists, the idea has remained grounded.

The subject has a number of ramifications impinging on banking reform and government policy affecting the financial sector. For example, the government has decided to accept some of the recommendations of the P. J. Nayak Committee report on corporate governance in the PSBs. A qualified, independent board of directors — appointed by a specially-constituted board — would naturally be able to better direct merger moves, if needed. Should the consolidation process wait until the major recommendations of the Nayak Committee are implemented?

Another overlapping issue concerns capital adequacy. If a big bank were to absorb a smaller one, it is assumed that the former will be adequately capitalised and have a better grip over its non-performing assets, at least compared to the bank it seeks to absorb.

That may not be the case in the present scenario. In fact, very recently the government allocated relatively smaller sums out of its recapitalisation budget to the bigger and better known banks. The logic was strange with the government claiming that the allocation was driven by efficiency parameters in which some of the bigger PSBs fared poorly compared to some smaller banks. In that case, how would a merger take place?

The finance ministry panel has suggested that the merger initiatives will have to be driven by market forces (and not dictated to by the government).This is the stand all governments have taken over the years. This is a welcome statement even though it implies that consolidation cannot happen overnight. The government’s influence will remain strong even if the bank shares are transferred to a newly- created investment trust or holding company, as suggested by the Nayak Committee. Besides, nearly all PSBs are listed and the share market will have its own ways of evaluating a merger proposal.

The panel has gone into some detail over what it thinks a roadmap for a successful merger between two government banks should be. Bigger banks should identify their own target banks. Small banks should reorient their loan portfolios, improve operational efficiencies and improve their risk management practices. Those are desirable objectives and need to be pursued even when no merger is contemplated. The difficulty again is in their implementation. Besides, it is not as though the bigger PSBs are better placed. In fact in some of the key areas such as NPA management, they have fared worse in proportion to their size.

Consolidation among government banks might be a desirable goal but at the moment both the concept and the roadmap suggested are highly theoretical. A takeover of a bank by another bank is not very common. The recent merger of the Kotak Mahindra Bank with the ING Vysya Bank is between two private banks. It comes as close as is possible to a strategic merger with presumed synergies. Going further back, barring the consolidation among the new generation private banks (such as the takeover by the HDFC Bank of the Times Bank and Centurion Bank of Punjab), the experience of mergers, amalgamations and so on has not been happy.

Most often, mergers have occurred due to government diktats and not through market forces.

The results have been disastrous for the entity forced to take over a failing bank.

The once top performing Oriental Bank of Commerce in the public sector has suffered grievously when it was forced to absorb the Global Trust Bank. Punjab National Bank’s experience in taking over the once leading Nedungadi Bank has not been different. State Bank’s step-by-step absorption of its associates has not been free of hassles despite the commonality of interests.

Finally, in a highly service-oriented industry such as banking, it will be disastrous to think that a successful merger involves merely a consolidation of two balance sheets. In all this talk, the human element is ignored. The challenge there is enormous. Many of the issues — such as upgradation of employee skill sets — need to be addressed on a priority basis even if the consolidation process is in the distant horizon,

Finally, there is this tantalising question. Is ‘bigness’ a necessary attribute for a bank to function effectively in India and abroad?

crl.thehindu@gmail.com

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