2nd September – Big bank theory : on Public Sector Banks merger

For its sheer magnitude, the scale and the ability to disrupt the status quo, the megabank mergers announced by Finance Minister Nirmala Sitharaman must go down as the most significant the banking industry has seen in the five decades since nationalisation.

Public Sector Banks merger

Aim –

The bottom line is clear: to create banks of the global level that can leverage economies of scale and balance sheet size to serve the needs of a $5-trillion economy by 2025.

The rationale behind the merger –

  • Mergers are driven by synergies — in products, costs, business, geographies or technology and the most important, cost synergies.
  • While there may be some geographical synergies between the banks being merged, unless they realise cost synergies through branch and staff rationalisation, the mergers may not mean much to them or to the economy. This is where the government’s strategy will be tested.
  • It is no secret that public sector banks are overstaffed. There is also bound to be overlap in branch networks such as in the Canara-Syndicate Bank merger, especially in Karnataka and a couple of other southern States. Ditto with Punjab National Bank and Oriental Bank of Commerce, both of which have strong networks in the north and the west.
  • The success of these mergers, therefore, will hinge on how well these banks handle the sensitive issue of staff rationalisation.

Background –

  • It was the Narasimham Committee in the late 1990s that recommended consolidation through a process of merging strong banks.
  • What the committee also recommended was shutting down the weaker banks and not merging them with the strong ones as is being done now.

Merits in merger –

The biggest plus of the mergers is that they will create banks of scale — there are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand. Yet, this advantage of scale cannot be leveraged without adequate reforms in governance and management of these banks.

Way forward –

  • The key reforms to be made are at the board level, including in appointments, especially of government nominees. These are often political appointees, with little exposure to banking.
  • Surely, such practices need to be curbed as the definition of global banks is not just about size but also professionalism in governance.
  • The government will also have to manage the fallout of unleashing four mergers simultaneously which is bound to cause upheaval in the industry.

SourceThe Hindu

Also read: 31st August – Government needs to be prudent in using RBI’s reserves