It seems to be a case of “who will bell the cat”, with regard to the merger of public sector banks (PSBs). Considering that the decision to merge has been left to the banks, will they ever come forward to be swallowed up? Or will the government have to push them to merge? The latter seems more likely.
Though the Modi government has rekindled talks on consolidation of PSBs, experts are doubtful whether it will happen with just one and a half years left till the general elections. “Unless the government gives directions [to banks] that you two merge, I have my doubts,” said Kuntal Sur, partner, financial services at PricewaterhouseCoopers.
This is not the first time that merger of PSBs have been suggested. Former RBI governor M. Narasimham recommended it in 1991. Union Bank of India and Bank of India did attempt a merger in 2004; it would have happened but for the stiff resistance from the Left parties, even though both banks had not envisioned job cuts. And, it will not be any easier now as some large banks like Punjab National Bank and Bank of Baroda have said that they will acquire only profitable banks.
Profitability, however, may be too much to ask. A second quarter analysis of 23 banks—13 private and 10 PSBs—by Care Ratings showed that gross nonperforming assets (NPAs) for both private banks and PSBs continued to increase. The NPA ratio of PSBs, at 13.4 per cent, was much higher than private banks—4.3 per cent. Among PSBs, IDBI Bank had the highest NPA ratio at 24.9 per cent, followed by UCO bank (19.7 per cent), Central Bank of India (17.2 per cent), and Punjab National Bank and Andhra Bank at 13 per cent each.
Some experts said there are more pressing issues than consolidation. “Cleaning banks’ books is a dire necessity because it is the root cause of a lot of issues that the economy is facing like lower private investment and lower credit growth,” said Bhavik Hathi, managing director, Alvarez & Marsal. “In such a situation, if an unhealthy bank is merged with a healthy one, the new entity’s financials will be affected and it might continue to bleed for a long time.”
Karthik Srinivasan, senior vice president at rating agency ICRA, too, said consolidation is not the panacea for the banking sector’s problems. “Past experience shows that mergers come along with a number of integration issues, which demand management attention and this may divert focus from the ongoing NPA resolution process,” he said.
Also, before moving on with mergers, recapitalisation of PSBs is a must. As per Fitch Ratings, PSBs will need around 14.16 lakh crore of additional capital by 2019 to address the problem of NPAs. The additional capital is also likely to help the banks meet the new Basel III standards—a set of reforms developed by the Basel Committee on Banking Supervision and expected to be implemented by the end of the 2019 fiscal.
There are also those who said consolidation is needed and that there is no good time to do it. “It is difficult to time it,” said D.K. Mittal, former financial services secretary. “Sometimes it will become a political issue, sometimes it will be a human resources issue. There will be problems. So, it is commendable that the government had the political courage to take a call. NPAs are a temporary impairment. It has to be worked out together.”
The logic behind the pro-consolidation argument is that it will improve economies of scale and operating efficiency. There are 21 PSBs currently doing the same kind of work. There is hardly any differentiation when it comes to their loan book, the way they target their customers or their geographical profile. “The question is whether so many banks are required to do the same work,” said Kalpesh J. Mehta, partner, Deloitte. “[Having] large banks will mean that their ability to fund large-scale corporate expansions will also go up. It will be easier for the government to control them operationally. Capital requirement may also come down with better governance.”
Though the NPA crisis is the major argument against consolidation, Ashvin Parekh, who owns an advisory firm in Mumbai, said that with consolidation, recovery of NPAs will be better. “Today, there are so many banks in the joint lenders forum and everybody talks about their own interest,” he said. “A large entity will mean concentrated effort towards recovery.”
Sur of PricewaterhouseCoopers said the government should allow private banks to participate in the mergers. “Private sector banks have a [good] track record in merging with banks that were in poor shape and then turning them around,” he said. “Be it ICICI’s merger with the Bank of Rajasthan or HDFC’s with Centurion Bank of Punjab.”
The huge strength of employees across banks and a powerful union is being cited as the most critical issue in bank mergers. “We have emphasised that the Centre should reconsider the plans of merger and consolidation of banks,” said C.H. Venkatachalam, general secretary, All India Bank Employees Association. “If banks are made bigger, there is no guarantee that they will be stronger.”
Within the banking industry, views are divided on consolidation. “Banks are going through a difficult situation,” said Kishor Kharat, MD and CEO, Indian Bank. “This is not the right time for mergers.” Union Bank of India MD Rajkiran Rai G. said that the merger of banks is not a simple exercise as there are several factors and each bank has a character of its own. “But consolidation of banks is a must as there cannot be many operating in the same space,” he said.
SBI’s merger with its subsidiaries and Bharatiya Mahila Bank might not be a great example to follow. The reason being that the subsidiaries were part of the same parent and their basic structures were similar. But it managed the human resource issue by absorbing and redeploying people from the subsidiaries. Some were also given the voluntary retirement scheme (VRS).
“We started communicating extensively with the staff, six months before the merger,” said Prashant Kumar, deputy managing director at SBI. “We were transparent and the redeployment was done based on their preferences.”
With technology fast replacing human interface in banking, the big question is how the government will deal with such a large workforce in the case of consolidation. The government’s financial position does not seem promising and there may not be scope for huge payouts under VRS. However, Parekh said that these concerns would be eased by superannuation—almost one lakh employees are set to retire in the next six years.
