Public sector bank consolidation: A painful journey ahead

The government has raked up the issue of merger between public sector banks, after a long gap. First, finance minister Arun Jaitley said in his budget speech that a roadmap for consolidation will be spelt out, which was followed up by the announcement to set up an expert panel to look into the issue of consolidation.

Consolidation among public sector banks was also in the agenda of the previous United Progressive Alliance government’s finance minister P Chidambaram but the then government wanted the proposal to come from bank board’s which never came. Merger between two banks would have cost the job of one of the chief executive, so one uttered the M word.

However, the stance of the present Narendra Modi-led Bhartiya Janata Party government has been vastly different. In first edition of Gyan Sangam, the bankers’ retreat organised by the finance ministry in 2015– government officials tested waters by floating the idea of consolidation. Bankers unanimous said time has not come for consolidation.

“After discussing the matter at length it was agreed that the current times is not the opportune time for consolidation and that the need of the hour presently is to strengthen the banks by empowering them with operational flexibility be it in the area of recruitment, or in differentiation on core capabilities,” minutes of the working group of Indian Banks’ Association which met to discuss consolidation in July last year, noted.

“Also it was envisaged that consolidation as and when the environment is congenial for the same is not going to happen through individual initiatives of the banks. The banks have to be driven towards the process though appropriate mandate by the major stakeholder i.e. government of India,”

The finance ministry got the clue, that the consolidation process has to be driven by the government.

So, the second edition of Gyan Sangam which took place earlier this month, the discussions was not if consolidation is needed. The discussion was how to consolidate, bankers who attended the retreat said indicating that the government’s resolve to push public sector bank mergers.

The need to have large banks cannot be over emphasised. No bank in the country features in the top ten banks in the country, in terms of asset size. State Bank of India – the country’s largest bank - is the only lender in the top 100 bank list. Given the huge large infrastructure needs of the country, large banks are required to finance it.

Consolidation will also increase capital efficiency, apart from improving the ability of banks to recover bad loans which are rising, experts said.

“There are two advantages of consolidation. One is that capital can be used more efficiently. The merged entity will have more leg room to raise capital,” said Ashvin Parekh, Managing Partner – Ashvin Parekh Advisory Services.

“At a time when NPAs are high, and banks are putting more effort in recovery, the ability to recover by smaller number of banks will be higher though a individual bank’s exposure may go up. This is because there are smaller number of voices … in the joint lenders’ forum today there are too many voices and each lender has a differential right with the borrower and they often not agree to a common recovery programme. With consolidation the recovery will be far more focussed,” Mr Parekh said.

Key for successful merger

Cost rationalisation is seen as one of key to make consolidation a success. This would result in cutting down branches, particularly in urban areas where there are too many branches of different banks in a same area, bankers said.

So, there is a view that banks from different geographies should be chosen for merger. For example, a south based banks should be merged with a north based bank. The recent acquisition by Kotak Mahindra Bank of ING Vysya Bank is a case in point, which primarily driven by the geographical synergies. Before the merger, 15 per cent of the Kotak branches were in south India, which improved to 38 per cent

Pratip Chaudhuri, former chairman of State Bank of India, however, feels public sector bank merger should be between by banks which are in same geographies.

“Lending, particularly to large corporate houses, is not the issue. The main objective is to get retail deposits. If a large bank from north India acquires a small bank from south India, then the merged entity’s south based branches will face difficulty in getting retail deposits,” Chaudhuri said indicating the importance of identity of a bank in a particular region.

When Mr Chaudhuri was the chairman State Bank of India (2011 to 2013), SBI merged one of its associate banks, State Bank of Saurashtra. “Customers of SBS was extremely disappointed. We have to cite example of how Sardar Vallabhbahi Patel had convinced all the princely states to accede to India,” he recollected. “This could lead to branch rationalization only in metro cities, but not in rural areas,” Mr Chaudhuri added.

The integration of human resources and their culture will also be easier if banks are merged from same geographies.

The other area is which should be the criteria for identifying banks for merger is the technology platform. Different banks have different technology platform which are developed by IT majors like Infosys and Tata Consultancy Services, to name a few. To merge two banks having different platform, could be a challenging task, bankers said.

Timing

But was the timing right? In last Gyan Sangam, bankers opposed the idea on ground that the health of their respective banks does not allow to takeover other banks. The situation has not improved in one year, rather it has further deteriorated if the Oct-Dec quarter results are considered. Many banks, including the likes of Bank of Baroda, IDBI Bank, Bank of India reported record losses.

“The overall observation that I will make is any time is a good time for consolidation. The real good time when consolidation should have happened is between 2005 and 2008 when the going was good. The issues that we are facing today that is of NPA and recovery, was not there then,” Mr Parekh said.

“Now what will happen is if you start focussing on consolidation then the focus on bad loans and recovery will get reduced. At that point in time the luxury was available. The other window that was available was between 2012 and 2014, when things started looking good. Today is the worst time,” Mr Parekh added.

Employee unions

One of the toughest challenges that the government will face while merging banks is from the employee unions and the employees who may fear identity loss. The unions have already started opposing the proposed privatization of IDBI Bank, in which the government said it would consider lowering stake below 50 per cent. The unions have called for a one day strike on 28 March to demand reversal of the government’s decision.

“What do we need? Big banks or good banks?” asked Vishwas Utagi, vice president, All India Bank Employees Association.

“We have always opposed consolidation among public sector banks. We have opposed it since 2004 when the then finance minister P Chibambaram talked about merger of Bank of India and Union Bank of India. At that time both the banks are profit making,” Mr Utagi said.

The Association said cleaning the bank balance sheet which the RBI has undertaken and the consolidation process that the government is planning, is a step towards privatizing the public sector banks.