Mega Banks Merger : The Global ANALYST cover story


 Submitted version of my article published as part of the cover story in the October, 2019 issue of The Global ANALYST:

Mega Bank Mergers
Size does matter
M G Warrier
“…You have to be a good seller of your ideas. You market them in different ways. That is where success lies.”
Vinod Rai, former CAG
“Growing to serve, serving to grow” decorated Canara Bank logo for a long time. The words “Together We Can” have replaced it recently. We will be watching whether the change has become prophetical, because people will now be watching whether Canara Bank and Syndicate Bank as also the other 8 PSBs which are coming together to form 4 big banks, ‘can’ serve their clientele better, post-merger.
The other day, my friend and ex-colleague Wagle telephoned me after a long time. After going round and round about weather and politics, he abruptly asked: “I have some FDs in X Bank. Do you think it is safe there or should I go for premature closure and think of some alternative investment?” I knew well that Wagle didn’t expect an answer as he went on to tell me that he had already consulted other friends and some bankers who have advised him to wait and watch as there were no threats of banks facing problem in meeting deposit liabilities. Still, in Wagle’s words, I could sense signals of a trust-deficit, now evident  among savers which is not in the best interests of India’s finance sector. Besides the announcement of merger, certain simultaneous developments in the financial sector, mostly relating to some large NBFCs too might have contributed to the confusion. From village money lenders to cooperatives and then to Self-Help-Groups/NGOs and recently to large NBFCs, Indian Financial Sector has been witness to the growth of quasi-bankers competing or cooperating with the formal banks in India. To differentiate one category of institutions from another from their names or office ambience to is becoming difficult for the common man, day by day.  Here we will restrict our discussion to PSBs merger.
Mega Merger announcement
Finance Minister Nirmala Sitharaman on Friday, August 30, 2019 announced merger of 10 public sector banks(PSBs) to form 4 PSBs asunder:
Punjab National Bank will take over Oriental Bank of Commerce and United bank of India
Canara Bank will take over Syndicate Bank
Union Bank of India will take over Andhra Bank and Corporation Bank
Indian Bank will take over Allahabad bank.
With this round of mergers, the number of PSBs will come down to 12 from 27 in 2017.
Post-merger, the estimated business size of 12 PSBs will be as under:
Sl No   Bank                                           Business size
                                                               ( In Rs lakh crore)
1           State Bank of India                     52.05
2           Punjab National bank                 17.94
3            Bank of Baroda                          16.13
4           Canara Bank                                15.20
5           Union Bank of India                    14.59
6            Bank of India                                9.03
7           Indian Bank                                   8.08
8           Central Bank of India                    4.68
9           Indian Overseas Bank                    3.75
10           UCO Bank                                   3.17
11         Bank of Maharashtra                     2.34
12         Punjab & Sind Bank                     1.71
The other mergers in the recent past involving PSBs were:
State Bank of India merged with itself the associate banks and Bharatiya Mahila Bank (2017)
 2 State Bank of India merged with it the State Bank of Saurashtra (2008)
 3 Oriental Bank of Commerce merged with itself the Global Trust Bank (2004)
Bank of Baroda merged with it the Benares State Bank Ltd (2002)
 5 Punjab National Bank merged with it the New Bank of India (1993-1994)
 Tamal Bandyopadhyay writing about bank mergers in the Business Standard on September 9, 2019,  inter alia gave a realistic recap of the progress of banking sector in India post-nationalization.
Perhaps, India may be the only country which has deployed the resources and outreach of banks as an effective tool in the nation’s economic development with focus on financial inclusion with insight and foresight continuously for half a century. It goes to the credit of GOI as owner of public sector banks and RBI as the regulator and supervisor of the banking system, that whatever has been achieved by financial intermediation across the sectors has been without much damage to the institutional system. This was made possible by timely intervention to restructure and reorganize the banking infrastructure, by reorganization of existing institutions and introducing new players where necessary from time to time. Viewed in this perspective, the present merger of 10 PSBs to form 4 is a continuation of such efforts. A page from history will help us understand this better.
Every second person you meet these days will tell you agonizing stories about public sector organizations, including PSBs in India. It may be recalled that the Presidency Bank of Bombay (PBB) started by the East India Company in 1840 failed in 1867. Reason: Reckless lending and resultant recovery issues. And lending being the main business of banks, irrespective of ownership, banks in India have failed when managements failed to follow prudent lending norms. According to one report, since 2000, as many as 555 private banks failed in the United States.
A page from history
Till Reserve Bank of India came into being on April 1, 1935, financial institutions, then banks were like wild growth of shrubs in forests in India. If banks failed before RBI came into being mostly on their own due to inefficient management like any other business failures, oimatence the supervision and regulation got formalized, there were closures, mergers and amalgamations with central bank intervention, with the enactment of Banking Regulation Act, 1049. According to one source, during the period 1913-66, nearly 1800 banks failed- 25% in Kerala, 21% in West Bengal and 20% in Madras.  Nearly 1250 bank failures were before the commencement of Banking Regulation Act. From 1969, till date, 36 private banks have been put under moratorium and vanished from the scene. In all the cases, GOI and RBI did take care to protect the interests of the stakeholders.
In fact, institution-building in the financial sector, from setting up of State Bank of India, apex financial institutions like IDBI, NABARD, Exim Bank, SIDBI, covering cooperative banks under the Banking Regulation Act, licensing new banks in private sector to need-based mergers and amalgamations of institutions has been part of joint efforts by RBI and GOI since 1950’s. The present merger is only a continuation of these efforts.
Expert view
Narasimham Committee on Banking Sector Reforms had decades ago recommended mergers to form a three-tier structure with three large banks with international presence at the top, eight to 10 national banks at tier two, and a large number of regional and local banks at the bottom. The present mergers together with the setting up of lower tier banks initiated by RBI when Dr Raghuram Rajan was Governor help achieve the objective of the recommendation.
Public Sector Vs Private Sector
There is an anti-public sector lobby in India which works overtime to destroy public sector organizations. Its modus operandi include weakening managements, infusing bad business practices in good-working PSUs and planting stories in the media to spread negativism. Restricting our discussion to the suggestion that privatization of PSBs will create the right incentives to save banking sector from the present difficulties, let us be clear about a couple of aspects. One, in India, more banks have failed in the private sector.  Second, post-nationalization, private sector banks did not expand their branch network in rural and semi-urban areas or change their business mix aggressively to grow faster than their public sector counterparts.
So long as banks continue to mobilize resources using the public deposit route, irrespective of their ownership, they will not be able to get away from the responsibility to provide need-based banking services including lending to priority sectors. GOI and RBI will have to ensure that all banks get a level playing field to manage their business professionally. From this angle, not only banks, but all statutory bodies and PSUs need a free hand, subject only to transparent regulatory mandates, to manage their resources, personnel and day-to-day administration.
Making mergers friction-free
Bank Employees’ unions have served a strike notice opposing mergers and making several HR-related demands. While announcing mergers, the Finance Minister has clarified that there will be no job loss and efforts are to ensure the transition smooth with minimum dislocation of services to clientele. As there are several precedents to look back now, it should be possible for GOI and RBI to guide the banks to honour this commitment.
Capital and Reserves Framework
Simultaneously with the merger announcement, the Finance Minister has also announced Centre’s intention to infuse need-based capital to PSBs. Assuring further infusion of capital where necessary, the initial proposal envisages release of Rs 55,250 crores (The amount includes, PNB- Rs16,000 crore, Union Bank of India-Rs 11,700 crore, Indian bank-Rs 2,500 crore, Bank of Baroda-Rs 7,000 crore, Central bank of India-Rs 3,300 crore, IOB- Rs3,800 crore, UCO Bank-Rs 2,100 crore, Punjab & Sind Bank- Rs750 crore, United bank of India- Rs1,600 crore)
There is a gross misconception about capital infusion to PSBs by GOI. As owner GOI is duty-bound to ensure capital adequacy and professional management in PSBs. There were valid and sufficient reasons for nationalization of banks in India. Whether PSBs are facing problems or not, Centre’s investment in share capital of banks is growing and fetching some annual return, depending on the business performance of banks, unlike the taxpayers’ money spent for some other purposes.
Just as RBI has got its Economic Capital Framework (ECF) studied by an expert group chaired by former RBI governor Dr Bimal Jalan, GOI and RBI may consider appointing a panel of experts to study the capital and reserves framework of statutory bodies and banks (including private sector banks). The expert panel may make comparisons with international practices and make recommendations keeping in view the Indian context and compliance requirements recommended by international organizations. A wholesale review covering adequacy of capital, liquid assets and reserves and realignment of their components may prove beneficial to the economy, as the exercise may release liquidity into the market.
HR issues
Of course, there will be some reduction in the number of positions on the boards of banks, which will be disturbing the bank unions having representation on bank boards. From Government’s and RBI’s side, this should be seen as an opportunity to professionalize and streamline the functioning of bank boards and also ensuring longer tenures for board positions. In the long term, inter-mobility of executives at senior management levels and longer incumbency at top positions should be planned. The need for continuity at the top, from board-level down to middle management level is part of quality management practices recognized world over. In India, insecurity of incumbency at the top became a tool to make strong-willed executives who respected rules more than the rulers ‘amenable’ since mid-1970’s. Change from this stance is visible in Delhi and one wishes the bias towards professionalism evident now will be sustained.
Though there is no case for parity with judicial appointments in higher courts where judges, once appointed, can be ‘removed’ only by following impeachment procedure, there is urgency in considering longer tenures for top level appointments in regulatory bodies and to positions like CEOs of banks. The appointments should be after suitable screening and once appointed they should not be under perennial threat of removal for political reasons. It is also desirable to provide economic security to the incumbents by way of a decent remuneration package which comprises reasonable post-retirement benefits so that they will not be remaining on the fences improving their CVs for their next job/assignment.
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