The merger of public sector banks (PSBs) is now the war-cry because everyone believes that it is a panacea—or at least a part of the solution—for the problems which confront them. Management consultants argued for this over a decade back, based on what has happened in other emerging markets. The FM spoke of it recently and RBI reiterated the same; hence, it is not surprising that the subject has come to the discussion board. But, have we stopped to think about the feasibility of the same?
Mathematically, merging a weak bank with a strong one can’t be disputed as the final result will look better than the current scenario. At the limit, the aggregate picture of all PSBs put together enhances overall performance. By merging a weak bank with high NPAs and negative net worth with a better performing one (invariably, SBI will be expected to carry this cross), the sum looks better in all respects. But, break it up into the component banks, and the cracks become visible.
Two sets of issues come up. The first is the feasibility of such mergers at a pragmatic level and the second concerns ideology. Looking at feasibility, some practical questions can be posed. First, what do we do with the multiple branches, as all banks have several branches in all important centres? The top 100 centres would have multiple branches of almost all banks, as this is where business lies. Sitting in an arm-chair, it is easy to say that we can close down the one which does less business or sell the property or close the lease. But, is this really possible?
Second, there is the issue of staff. In nationalised banks, typically 50% of the total employees consist of support staff, while for the SBI group, it is closer to 60%. To top it all, the staff is unionised and has to be taken along if such mergers are to work. This situation is hence different from the mergers we have witnessed in the case of private sector banks, where pink-slips are handed over under the guise of voluntary retirement schemes and there is no recourse available to the employees. This is a hard call, given the number involved is nearly 8 lakh employees.
Third, there are challenges at the higher echelon levels too as there will be duplication of positions. There will be multiple CMDs and MDs and EDs who have to be sifted, and this will entail a lot of pain as some may have to leave.
Further, several departments have to be realigned or closed, such as treasuries and risk management, as these activities are really scalable where volumes growth does not justify commensurate increase in This has been relatively easier when two private banks have merged or a bank bought over. The private sector is ruthless and the higher pay scales carry an unemployment trade-off as they use euphemisms such as shareholder value for downsizing. This is not the case with the public sector where there is surety of tenure even as compensation is substantially lower—the earnings of a private sector chief could be 25 times that of a PSB head. Interestingly, it has been argued in some quarters that if the same logic were to be applied to, say, the government where there are multiple ministries that can be potentially merged (i.e. steel, textiles, commerce and industry, SMEs, the bureaucracy would become less heavy). As a corollary, it has been asked whether we are prepared to do the same rationalisation for secretaries and their ilk in the government.
Fourth, there are cultural issues and while we do tend to paint them with the same brush, the approach to banking, work culture, customer centricity varies between North-based banks and South-based ones. How do we resolve this conundrum?
Fifth, the orientation of banks is different. Some are more into rural banking while others have a strong industrial or infrastructure proclivity. Hence, besides looking at performance indicators, the business blend of such mergers has to be judicious, else, we will be concentrating risk in some areas.
Last, the issue of technology is also important which has to be resolved before any action is taken. While most could be using similar platforms, they have to be compatible. But this may be the least of all the worries,
At the ideological level, interesting questions pop up. First, by going in for such mergers we would be creating huge oligopolistic structures which may not be desirable. This is so because at some time they will be privatised which in turn will make them different entities. In every industry, we are trying to induce competition, while in banking we are reducing this level by design.
Second, the whole idea of multiplying the system with small and payments banks appears to be against the ethos of creating such big structures. We need to ask ourselves as to whether or not there is a contradiction here. At a later stage, will we opt for merger of these small banks and payments banks, because they would also be facing similar challenges as size will matter?
The point really is that we are missing out on addressing the core issue and going around the periphery to address the problem. We have to identify the motivations for such mergers and address them appropriately like strong credit processes, governance, non-interference, competence, etc. Merging banks will serve little purpose if we have fewer structures with the same blemishes.
If government interference is the reason, it should move away from running banks. If there are governance issues, they should be addressed forthrightly. If there is absence of talent and the decisions taken are out of incompetence, then we need to get the right people. If there is no incentive structure, it should be brought in. There is no point in PSBs earning profits and paying the government a dividend if it has to come back to recapitalise them. Instead, if pay scales are made attractive, there would be the right talent.
Merging PSBs may be myopic in nature when alternatives exist to strengthen them. Decentralisation has been the buzz word when we talk of the rest of banking or even geographic demarcation of our states as they work better. Weak banks can walk the road of narrow banking until such time their books are clean, which is preferable to doing things in a hurry as it sounds neat today. For sure, we should think deeper.
Mathematically, merging a weak bank with a strong one can’t be disputed as the final result will look better than the current scenario. At the limit, the aggregate picture of all PSBs put together enhances overall performance. By merging a weak bank with high NPAs and negative net worth with a better performing one (invariably, SBI will be expected to carry this cross), the sum looks better in all respects. But, break it up into the component banks, and the cracks become visible.
Two sets of issues come up. The first is the feasibility of such mergers at a pragmatic level and the second concerns ideology. Looking at feasibility, some practical questions can be posed. First, what do we do with the multiple branches, as all banks have several branches in all important centres? The top 100 centres would have multiple branches of almost all banks, as this is where business lies. Sitting in an arm-chair, it is easy to say that we can close down the one which does less business or sell the property or close the lease. But, is this really possible?
Second, there is the issue of staff. In nationalised banks, typically 50% of the total employees consist of support staff, while for the SBI group, it is closer to 60%. To top it all, the staff is unionised and has to be taken along if such mergers are to work. This situation is hence different from the mergers we have witnessed in the case of private sector banks, where pink-slips are handed over under the guise of voluntary retirement schemes and there is no recourse available to the employees. This is a hard call, given the number involved is nearly 8 lakh employees.
Third, there are challenges at the higher echelon levels too as there will be duplication of positions. There will be multiple CMDs and MDs and EDs who have to be sifted, and this will entail a lot of pain as some may have to leave.
Further, several departments have to be realigned or closed, such as treasuries and risk management, as these activities are really scalable where volumes growth does not justify commensurate increase in This has been relatively easier when two private banks have merged or a bank bought over. The private sector is ruthless and the higher pay scales carry an unemployment trade-off as they use euphemisms such as shareholder value for downsizing. This is not the case with the public sector where there is surety of tenure even as compensation is substantially lower—the earnings of a private sector chief could be 25 times that of a PSB head. Interestingly, it has been argued in some quarters that if the same logic were to be applied to, say, the government where there are multiple ministries that can be potentially merged (i.e. steel, textiles, commerce and industry, SMEs, the bureaucracy would become less heavy). As a corollary, it has been asked whether we are prepared to do the same rationalisation for secretaries and their ilk in the government.
Fourth, there are cultural issues and while we do tend to paint them with the same brush, the approach to banking, work culture, customer centricity varies between North-based banks and South-based ones. How do we resolve this conundrum?
Fifth, the orientation of banks is different. Some are more into rural banking while others have a strong industrial or infrastructure proclivity. Hence, besides looking at performance indicators, the business blend of such mergers has to be judicious, else, we will be concentrating risk in some areas.
Last, the issue of technology is also important which has to be resolved before any action is taken. While most could be using similar platforms, they have to be compatible. But this may be the least of all the worries,
At the ideological level, interesting questions pop up. First, by going in for such mergers we would be creating huge oligopolistic structures which may not be desirable. This is so because at some time they will be privatised which in turn will make them different entities. In every industry, we are trying to induce competition, while in banking we are reducing this level by design.
Second, the whole idea of multiplying the system with small and payments banks appears to be against the ethos of creating such big structures. We need to ask ourselves as to whether or not there is a contradiction here. At a later stage, will we opt for merger of these small banks and payments banks, because they would also be facing similar challenges as size will matter?
The point really is that we are missing out on addressing the core issue and going around the periphery to address the problem. We have to identify the motivations for such mergers and address them appropriately like strong credit processes, governance, non-interference, competence, etc. Merging banks will serve little purpose if we have fewer structures with the same blemishes.
If government interference is the reason, it should move away from running banks. If there are governance issues, they should be addressed forthrightly. If there is absence of talent and the decisions taken are out of incompetence, then we need to get the right people. If there is no incentive structure, it should be brought in. There is no point in PSBs earning profits and paying the government a dividend if it has to come back to recapitalise them. Instead, if pay scales are made attractive, there would be the right talent.
Merging PSBs may be myopic in nature when alternatives exist to strengthen them. Decentralisation has been the buzz word when we talk of the rest of banking or even geographic demarcation of our states as they work better. Weak banks can walk the road of narrow banking until such time their books are clean, which is preferable to doing things in a hurry as it sounds neat today. For sure, we should think deeper.
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