Four mergers of public sector banks (PSBs), which control two-thirds of India's banking in terms of advances and deposits are meant to create a stepping stone to India's $5 trillion GDP target.
The PSB universe will now have half a dozen large banks with Rs 10 lakh crore-plus balance sheets, two national banks and four regional banks. But how do the mergers help?
The biggest advantage, says State Bank of India (SBI) Chairman Rajnish Kumar, is that bigger banks have greater ability to absorb shocks, reap economies of scale as well as the enhanced capacity to raise resources without depending on the exchequer.
Banks are indeed the backbone of the economy in their role in credit intermediation. Fewer but larger banks will also help the Centre monitor their performance better, ease credit decisions and facilitate quicker restructuring or resolution plan in a consortium in the event of defaults.
Centre itself has listed out three broad gains out of the current consolidation exercise: increased capacity to lend, strong national presence and global reach, and operational efficiency gains to reduce the cost of lending.
But it is easier said than done. Size alone won't guarantee better results. The State Bank of India (SBI) is a classic example. The largest bank doesn't figure in the top quartile in terms of performance.
Product differentiation is completely missing and it seems the technology platform was one of the major drivers for deciding the banking mix of banks. Do we need more clones of each other? Experts suggest there should be a differentiation in terms of product category, say SME or emerging corporate-focused banks or purely retail banks or large corporate banks. Currently, there are specialised banks in the market. For instance, the HDFC Bank, Kotak Bank, etc. are emerging as retail banks. There are Bandhan Bank and host of small finance banks that are focused on catering to unbanked and underserved segments of microloans.
In a slowing economy where the asset quality deterioration of PSBs has still not receded, the merger move could be counterproductive. "The choking of management bandwidth should not result in a slowdown in credit flow to the economy," says Anil Gupta, Vice President at rating agency ICRA Ltd.
The entire time and energy of management would get wasted in issues like people adjustment, managing cultural differences, overlapping of branch and technology integration, etc. PSBs may be swarmed under merger pangs. So what are the big challenges?
Governance reforms are mostly on paper, what PSBs need is structural reforms
The PSB model of banking with government ownership, control and also lending support to government's agenda (priority sector, financial inclusion, Mudra, etc.) has been a big stumbling block for bringing about a change in their functioning. The merger announcement doesn't address the core structural and fundamental issues plaguing the PSBs. The setting up of Banks Board Bureau (BBB) in NDA-I was path-breaking, but this model was not pursued to its logical end. The power of BBB was restricted only to appointments of senior management and directors. The government didn't extend BBB's scope to human resource (HR) reforms, NPA and stressed assets resolution, risk management, etc.
The next logical step of BBB was setting up of Investment Holding Company (IHC) for housing the government stake, but there was no progress towards that. The announcement did give the power to banks' board and also offers operational flexibility in hiring from the market, but the question is whether talent from the private sector would be willing to join a PSB. Market-linked compensation with a fair management appraisal system is yet another big challenge for PSBs.
Earlier bank mergers being cited to sell recent ones; they're as different as chalk and cheese
The Finance Minister highlighted Bank of Baroda-Vijaya Bank-Dena Bank merger as a success story with 'wide-ranging benefits'. Bank of Baroda (BoB) and SBI merger and current mergers are as different as chalk and cheese. First, the SBI merger with associates was an easy one as associate banks were part of the SBI network, culture and technology umbrella. Also, there was synergy in the management. SBI chairman used to be the chairman of associate banks. Similarly, the BoB merger was different as the government brought in two professionals -- P S Jayakumar, a former Citi banker, and Ravi Venkatesh, former chairman Microsoft India, who completely transformed the bank with new technology, digitisation, tie-ups with Fintechs, lateral talent and new products.
These four mergers are completely different from one another. They all are facing similar issues like falling profitability, asset quality deterioration, an ageing workforce, and laggardly approach to digitisation. They all are also corporate banks in nature while retail banking is still very small. "The mergers are mostly among larger banks with absorbing bank not necessarily in strong health," says Prakash Agarwal, Head ( Financial Institutions) at India Ratings.
Consolidation no guarantee of all-round gains
Mergers make them bigger, but are they better? A merger is not all about the merger of balance sheets. There are many qualitative factors that matter. The government has listed out three broad gains out of the current consolidation exercise. They called it 'Unlocking potential through consolidation'.
First is enhanced capacity to increase credit. The consolidated banks will have a higher capacity to lend, but they also need capacity building especially in the areas of project appraisal, risk management and monitoring. A bank like SBI with huge balance sheet has also landed in trouble with almost similar asset quality issues as other PSBs.
The second gain listed is the strong national presence and global reach. The PSBs already control over two-thirds of the banking. So far as the global reach is concerned, the Indian banks have a long way to go. The competition from private banks is slowly eating away the PSBs share because of better digitisation, faster processing of loans and also better customer service.
The third potential gain area is the operational efficiency gains to reduce the cost of lending. This is one area where the entire operating model has to change. The PSBs still operate in an old fashioned way.
The missing merger strategy: Merger of weak banks with stronger will weaken the larger bank
The Punjab Nation Bank (PNB) has got two weak banks - Kolkata based United Bank of India is still under the RBI's prompt corrective action (PCA) framework, while the Delhi-based Oriental Bank of Commerce (OBC) came out recently from the PCA. All three banks are not in the best of their health. The weak bank will eventually weaken the stronger entity. Both the OBC and United Bank are at the bottom in the mid-sized banking category.
For instance, the PNB-United Bank-OBC will have a combined workforce of over 1 lakh. In case of a similar balance sheet size banks in the private space, like the ICICI Bank and HDFC Bank, the employee strength is around 90,000. And these private banks are more retail-oriented which is people-intensive. Banking has changed in the last decade with product-focused banks. There are retail banks, small finance banks, payments banks, etc. The PSBs seem to be playing the old game of corporate banking where the private banks are vacating the space because of asset-liability management issues.