FINANCIAL SCENE
Bank consolidation: pitfalls of a hasty decision
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There must be a process of all round consultation involving all stakeholders before any scheme of bank mergers is taken up.
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After a period of relative quiet, the subject of consolidation in the Indian banking industry is back in focus. While no policy statements have come from either the government or the Reserve Bank of India, reports of a meeting that the chairmen of the five top public sector banks had with officials of the Finance Ministry have evoked renewed interest in the subject.
The heads of Punjab National Bank, Canara Bank, Bank of Baroda, Bank of India and Union Bank of India were reportedly asked for their views on consolidation so that a road map could be prepared.
No discussion paper, leave alone a major policy announcement on bank mergers, is round the corner. In fact one of the participating bank chairmen — K. R. Kamath of Punjab National Bank — said a few days later that consolidation of public sector banks through mergers would be a long-drawn out affair and that it was vital to convince all the stakeholders before finalising a merger.
New government stance
These are well considered views and are in conformity with what Finance Minister Pranab Mukherjee said in June. PSBs should look at consolidation as a serious option but the initiatives should come from the banks themselves. In other words, the Finance Ministry will not drive the mergers but will play a supportive role if proposals do emanate from banks. The latest policy stance is in sharp contrast to the one that prevailed earlier, when the government wanted mergers to take place within a fixed timeframe.
Consolidation has been on the policy agenda ever since the Narasimham II Committee’s report on financial sector reform (1997) recommended the creation of four or five large banks in place of the 27 PSBs. Enhanced capital adequacy was touted as one of the benefits. However, if the government is to retain at least 51 per cent of the equity capital in any PSB, identifying a merger partner becomes extremely difficult.
This is because barring two, all the PSBs are listed on the stock market with varying degrees of non-government shareholding.
In any case, to think that a merger between two PSBs can be brought about quickly is a pipe dream.
Ownership constraint
The following factors suggest that any such merger will be neither voluntary nor free from glitches.
One is the ownership structure of the PSBs all of which have the government as the majority shareholder. Despite the Finance Minister’s assertion that mergers will not be dictated, boards of individual banks and their chairmen will be only too eager to please the powers that be. Such attitude is extremely difficult to shake off if past experience is any guide.
PSBs never had the autonomy to decide on such major policy matters. In fact a few big banks have declared their intention to merge with some other banks. Such “testing the waters” is only for the purpose of being seen to be extremely accommodative of the government’s intentions. A few years ago wide publicity was given to a possible merger between Bank of India and Union Bank. This time it is Canara Bank seeking a fit with Dena Bank.
Two, the government being the majority shareholder does not mean that it can ignore the interests of minority shareholders. Guidelines of the Securities and Exchange Board of India and stock exchanges will have to follow.
Elusive synergies
Three, it is difficult to see synergies accruing from such mergers.
For instance, seeking a geographical or cultural fit between two banks is only theoretically possible. All government-owned banks have acquired an all India character even though in their private sector days they have regional in character. A merger will entail duplication of branch network especially in towns and metros.
Synergy in technology application will be equally elusive given that the banks are in different stages of technology absorption and use different platforms.
A more difficult task is to achieve a cultural fit post-merger. Though all of them are government-owned, each has certain unique cultural strengths that cannot be retained after the merger. In their pre-nationalisation days, some of the banks had affinities with specific business activities and groups. These have continued under government ownership. For instance, Bank of India and Bank of Baroda have had a strong stock market tradition, which has flourished well into their public sector days.
There is a real possibility that such strengths will be dissipated after merger with a bank with little exposure to the stock markets.
Human factor
Four, a successful merger implies a reasonably smooth integration of staff and human resources related systems.
This will be, by far, the biggest challenge. By their very nature, bank or financial service entities are people-centric. It is not clear whether those who advocate mergers as an easy option are aware of the strengths of such human capital.
There are many other reasons why a merger between PSBs will neither be easy nor beneficial.
Some of the world’s biggest banks, the Citigroup notably, which relied heavily on mergers and acquisitions to grow phenomenally, have been rapped on the knuckles by the regulators and are realising that such stupendous inorganic growth has come at a price.
Again in the U.S. the intense pace of bank consolidation that followed the federal inter-state banking legislation in 1994 has not been beneficial for small businesses, which are the major job creators.
According to a study conducted on behalf of the U.S. Small Business Administration Office and Advocacy, their access to credit has been sharply curtailed.
C. R. L. NARASIMHAN
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