THE QUARTERLY GDP numbers were announced on August 30. As expected, there was nothing to write home about—at 5 per cent, India's economy grew at its slowest pace in six years. But Finance Minister Nirmala Sitharaman tried to kindle some excitement, perhaps in an attempt to distract people from the news of the official validation of the slowdown, and held a media conference to announce the merger of 10 public sector banks into four entities.
The mergers will reduce the number of state-owned banks to 12. The earlier mergers of Bank of Baroda with Vijaya Bank and Dena Bank, and State Bank of India with six associate banks and Bharatiya Mahila Bank had reduced the number from 27 to 18. “These 12 solidly present, well-consolidated, energised, adequately capital-endowed banks will now operate to target $5 trillion economy and give the necessary support for banking facilities required by our customers,” Sitharaman said at the media conference.
The 10 banks will receive capital infusion of 055,250 crore from the government in the current fiscal. The government hopes that the consolidation will help cut costs, boost efficiency and achieve scale. “Better placed banks would mean less burden on taxpayers,” said Rajiv Kumar, finance secretary, after the mergers were announced.
The grouping of the banks was principally based on the core banking platforms used by them and their capital adequacy position. The first group comprising the Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and United Bank of India use the Finacle technology platform. This merger will create the second largest bank in the public sector. Of these, PNB's capital position is not that healthy and the bank's lending is restricted by the Reserve Bank's prompt corrective action (PCA) framework. OBC has just come out of the PCA framework and United Bank is still under PCA.
The second group, to be created by the merger of Canara Bank and Syndicate Bank, operates on the iFlex core banking platform. This bank will have a significant presence in south India and has relatively better financials.
The third group—Union Bank, Corporation Bank and Andhra Bank—also operates on Finacle, and it will be the fifth largest public sector bank after the merger. All three recently came out of the PCA framework after satisfying the banking regulator on the provisioning made against bad loans.
The last group of Indian Bank and Allahabad Bank uses the BaNCS platform. While Indian Bank is one of the better performing banks, Kolkata-headquartered Allahabad Bank is still on a weaker footing and had just managed to come out of the PCA framework.
Mukesh Kumar Jain, MD and CEO of Oriental Bank of Commerce, said it was a win-win for all the banks, the government and the RBI. “The merger would create operational efficiency and help optimise our resources. Consumers will benefit the most as loan rates will come down over these efficiencies,” he said. Asked about loss of jobs, Jain reiterated what Sitharaman had said—not a single job would be lost in the amalgamation process.
The news, however, had an adverse effect on the markets. Share prices of all publicly listed banks took a hit in the trading sessions after the announcement. On September 3, the Bank Nifty, represented by 12 largest public listed banks, fell by 66 points, or 2.2 per cent, after the day’s trade.
And, market economists and experts are contesting the big bank theory citing the past bank mergers that neither revived credit growth nor led to any meaningful cost reductions. “The last bank merger of Bank of Baroda with Vijaya Bank and Dena Bank was not welcomed by the market,” said Abhimanyu Sofat, head of research at IIFL Securities. “Except for achieving some reduction in cost of funds we have not seen any significant fall in credit cost of the amalgamated Bank of Baroda.” In the three months since the amalgamation was operationalised, Bank of Baroda shares fell by more than 30 per cent, compared with a 10 per cent fall in the Nifty PSU Bank Index in the same period.
Global rating agency Fitch Ratings, too, remains unconvinced about the viability of the mergers. “Given the limited flexibility on restructuring and rationalisation, meaningful cost synergies from PSB mergers are unlikely,” said the agency in a report on September 2. “While the large recapitalisation improves the capacity for banks to grow loans, the recent experience of State Bank of India and Bank of Baroda indicates that focus on integration impacts near-term growth.”
Some economists are of the opinion that these mergers may not be enough to revive consumer demand. “The fall in banks' credit disbursal numbers is an effect of the slowdown. It is not the cause as the government may have thought,” said Naresh Makhijani, head, financial services, KPMG India. “Now, only a reversal of the slowdown in investments and savings would help revive the banking sector.”
The merger announcement has also raised concerns about jobs notwithstanding the finance minister's claims. Earlier, in a response to a question in the Rajya Sabha after the SBI merger, Shiv Pratap Shukla, minister of state for finance in the first Modi government, had said that it had led to the closure of 400 branches and voluntary retirement of more than 7,000 employees. Bank unions expect the new mergers to trigger another round of job loss in the sector. “The job losses in the sector would be in great numbers this time,” said C.H. Venkatachalam, general secretary of All India Banking Employees Association. “Also, we are amazed that the government had not mentioned anything about the management of bad debts of these banks.”
There are also concerns that the mergers would lead to more litigations for the bank and the government. “Already the merger of Bank of Baroda with Dena Bank and Vijaya Bank has been questioned at the Supreme Court,” said S. Nagarajan, general secretary, All India Bank Officers Association. “Our issue is that the government is going about these mergers as executive orders without placing the proposals before Parliament or adhering to the provisions of Banking Regulations Act, which specifies the procedures to be followed for such mergers.”