Banks' Mergers: The Global ANALYST, July 2017

Banks’ Mergers: Big is Beautiful!*

M G Warrier, Ex-GM, RBI

“The importance of a strong and efficient financial system with an adequate geographical reach and diversified functional spread can hardly be underestimated in terms of our broader national objectives of growth, social justice and external viability. The financial system is perhaps the most important institutional and functional vehicle for economic transformation. Finance is indeed the bridge between the present and the future, and whether it be the mobilization of savings, or th ir effective, efficient and equitable allocation for investment, it is the success with which the financial system performs its function that sets the pace for the achievement of broader national objectives.”
-M Narasimham, Former Governor, RBI
It is interesting to observe that GOI and RBI are working together most harmoniously on several crucial issues affecting Indian Economy and more particularly on Financial Sector Reforms at a time when media and analysts are wasting precious resources to build stories on a rift between the Finance Ministry and RBI. Their joint initiatives that fructified during the recent months/years include setting up of Banks Board Bureau under Vinod Rai, constitution of Monetary Policy Committee with eminent professionals as members, concluding the merger of associate with SBI and a bold move to handle stressed assets of the banking system under mandated guidance from RBI. Finance Minister has strengthened the hands of RBI by giving out strong signals that actions taken and guidance provided by the central bank will get unreserved support from GOI. The stance taken by GOI that state governments considering dole outs in the form of loan waivers etc will have to also find resources for funding such measures has to be seen in this perspective. Of late, Finance Minister Arun Jaitley too has started being more liberal in expressing GOI’s willingness to support RBI in performance of the central bank’s responsibilities without let or hindrance.

The above background makes one say with confidence that “Together, GOI and RBI can” do wonders. The SBI-Associates Merger, which was dodged on several occasions in the past and executed quickly recently, is a success story which can become a case study. Hopefully, when the whole process gets complete, all the doomsayers including those who feared large scale job loss will be proved wrong. Let us remember, restructuring is not about ‘closure of business’, but about realignment of structures to meet the needs of changing times and optimizing deployment of resources. Same applies to mergers also.

Unfortunately, financial sector reforms in India in the past  suffered, all through, from the impact of a “blow hot, blow cold” approach not only from the policy makers and political leadership, but from mainstream media and analysts also.  Diverse vested interests always tried to use any one of them or a combination from these agencies to dodge changes which they considered, may affect their profit motives. Reforms in any sector do not make sense independent of a pragmatic approach to institutional restructuring and infusion of professionalism in management.

Proposal for restructuring banks is not a novel idea, either. The Committee on the Financial System (Narasimham Committee I) which submitted its report on November 8, 1991 had this to say on the structure of the banking system:
“…The Committee is of the view that the system should evolve towards a broad pattern consisting of :
(a)  3 or 4 large banks (including the SBI) which could become international in character;
(b) 8 to 10 national banks with a network of branches throughout the country engaged in ‘universal’ banking;
(c)  Local banks whose operations would be generally confined to a specific region; and
(d) Rural banks (including RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities.

The spirit of the recommendation above remains relevant even today and acceptance of its relevance by policy makers is evident in the tone of recent deliberations at the highest level. What is needed now is integrating the changes in the mix of institutions and the changes in approach that are necessary to take cognizance of the advances in technology.

RBI’s perception
The Reserve Bank of India Governor Urjit Patel while delivering the Kotak Family Distinguished Lecture at Columbia University in  New York during the last week of April 2017 observed that the Indian banking system could be better off, if some public sector banks are consolidated to have fewer but healthier entities, as it would help in dealing with the problem of stressed assets, which he flagged as a challenge before the central bank today. He observed:
“As many have pointed out, it is not clear that we need so many public sector banks. The system could be better off if they are consolidated into fewer but healthier banks.”
Dr Patel was of the view that since there were cooperative banks and micro-financial institutions to provide community-level banking, some banks can be merged, as a quid pro quo for timely government technical injection.
Patel noted that a series of measures have been taken in the past year on resolving the problem of the non-performing assets (NPAs), including completion of a comprehensive asset quality review of the banks.
Patel said in the instance of the insolvency and bankruptcy code, the Reserve Bank of India (RBI) has been preparing actively for the next step in an orderly resolution and this will be undertaken concomitantly with the resolution of the weakest bank balance sheets under the aegis of a revised prompt corrective action framework. He felt that the public sector banks need to raise private capital from the market and reduce reliance on government largesse. Probably, sharing the burden of recapitalizing may make the institutions more responsible to the stakeholders. RBI Governor mentioned that this will be a good way to restore some market discipline and get the banks and their shareholders to more seriously care about management decisions.
Dwelling in some detail, Dr Patel said that consolidation of banks could also entail sale of real estate where branches are redundant as well as offering voluntary retirement schemes to manage headcount and adding younger, digital—savvy personnel. Of course, these are all details which could be tied up, once GOI and RBI decides the direction. Dr Patel strongly expressed the view that divestment in public sector banks would have a positive role for the sector and the measure would improve overall banking sector health.
Way forward
The merger of associate banks with SBI has shown that all blames dumped on employees were misplaced. As a large geographical area remain still unbanked or under-banked, surpluses in terms of manpower released can easily be redeployed elsewhere. As public sector banks and private sector banks raise resources from the same source and by and large are expected to serve the same clientele, GOI should avoid the temptation to ‘divide and rule’ and encourage a level playing field for both categories of banks in terms of regulatory environment, functional autonomy, a self-regulated revenue-based remuneration package and professional management of human resources.

 The need for reorganization of Indian banking infrastructure to rationalize functional responsibilities, presence and outreach is as old as nationalization of banks. All along, we had a touch and run or ‘first-aid’ approach to financial sector reforms. Committees and Commissions, periodically have made recommendations on this issue, but restricted mandates or selective approach in accepting recommendations have delayed a comprehensive look at structural alterations.

Even during the last four years when RBI was visibly serious about changes in the institutional system in the financial sector, measures were sporadic and didn’t take a global view in the context of existing infrastructure and future needs. Thus we see new institutions coming up and making existing ones running for life, branches and ATMs of several banks crowding commercially developed zones while small towns, less posh urban and semi-urban areas as also rural India wait for reasonably acceptable banking services within reach.
The merger of associate banks with SBI has shown that all blames dumped on employees were misplaced. As a large geographical area remain still unbanked or under-banked, surpluses in termsof manpower released can easily be redeployed elsewhere. As public sector banks and private sectorbanks raise resources from the same source and by and large are expected to serve the same clientele, GOI should avoid the temptation to ‘divide and rule’ and encourage a level playing field for both categories of banks in terms of regulatory environment, functional autonomy, a self-regulated revenue-based remuneration package and professional management of human resources.
Writing on the subject Dr Charan Singh had observed that long term and enduring solution to the present problems of PSBs would lie in a slew of measures, many of which were tried sporadically as quick-fix or first aid ones from time to time and suggested constitution of a High Powered Committee (HPC) to go into the whole issue of structural reforms in the banking sector. The HPC, if constituted should be a representative body of experts, stakeholders including GOI and RBI and employees’ interests. While private sector participation should not be discouraged, at present stage of development, the public sector identity may have to be preserved to ensure the continued performance of priority and social sectors responsibilities by banking sector. The HPC could look into:
(a)  Merger of weak public/private sector banks with strong banks either in the public or private sector which are interested in expanding business.
(b) Rationalizing branch network by initiating enabling legislative measures for closure/merger of branches in areas where there are more than necessary number of branches for historical reasons.
(c)  Rationalizing ATM network. Pooling of ATMs will save unnecessary maintenance expenditure including security costs.
(d) HR issues including recruitment, career progression and remuneration packages in PSBs vis a vis their successful counterparts.
(e) Focus on the need to ensure efficiency and autonomy in management at top level.
(f) Possibility of lateral mobility of middle and top level executives across public sector and private sector banks and supervisory and regulatory bodies in the financial sector. Ideally, as early as possible, a Financial Sector Service comparable with other civil services should evolve.
(g) Revisiting Lead Bank Scheme LBS) to ensure that social responsibilities are not neglected. The LBS model of 1980’s had certain ingredients like involvement of different stakeholders in resources mobilization and credit planning and ensuring a project approach in development activities.   (h) Enforcing discipline in lending to big borrowers     and transfer of business to other PSBs or private sector banks in geographical areas where a particular bank is not successful. Merger of loss-making or redundant bank branches with branches of other banks.
 (i) Possibility of lateral mobility of middle and top level executives across public sector and private sector banks and supervisory and regulatory bodies in the financial sector. Ideally, as early as possible, a Financial Sector Service comparable with other civil services should evolve.
Privatisation not an acceptable option

The history and evolution of Indian banking sector during the last 4 decades do not take one to accept privatization of public sector banks as a solution for the present problems. With the exception of State Bank of India, Indian banking sector was under private ownership for decades after independence. The need to nationalise was felt in the context of the refusal of private sector to cater to the development needs of the country including taking banking service to semi-urban and rural areas and meeting the credit needsof small borrowers. Such responsibilities are still met by PSBs is evident from the fact that post-nationalisation, the residual and new private sector banks together could, till date, manage a market share of less than 30 per cent in the country’s banking business.
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*Submitted version of article published in The Global ANALYST, July, 2017


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