Will bank mergers make a difference? Financial Express 7th Sept 2019

The decision to merge disparate PSBs into a set of 12 banks is quite a big step, and adds a new chapter and outlook to the concept of public sector banking. We had the Indradhanush Scheme in the earlier episode of banking reforms, in 2015, and after the successful merger of SBI with its associates, and that of Bank of Baroda with Dena Bank and Vijaya Bank, the government is more certain about the future path. From an economist’s point of view, what does this mean?

Merger of PSBs is often seen as a compromise as it does not change the way in which banking is conducted, and is analogous to merging various state departments. Ideologically, it is clear that ownership remains with the government; there would be no let-go on this aspect of banking. The staff count does not go down, which is a positive compared with mergers of private banks, where several jobs, especially at the senior level, are dispensed with. There are savings, in case branches are closed, and staff transferred, which is painful, but preserves tenure of staff. Besides, when it comes to PSBs, officers are used to transfers. But, the latest presentation is silent on how various senior positions have been re-allocated in the last two episodes of mergers as there cannot be multiple risk, credit, treasury, operations, IT, etc, heads. Clearly, several staff may have lost their seniority. But, this can be rationalised as being necessary for the larger good. What is the larger good?

It is interesting that PSBs are still talked of as instruments used for meeting larger political goals. For instance, for MUDRA loans to SMEs targets have been set for PSB, but not for private banks. The one time settlement (OTS) scheme for SMEs spoke of holds for PSBs only; it is not obligatory for private banks. Also, when there is an assurance that some PSBs have agreed to link their lending rates to the repo rate, it is implicit that there are orders from above. Therefore, even today, PSBs are not as free as their private counterparts when it comes to taking credit decisions at the macro level. Even the Jan Dhan exercise was driven by PSBs, as are loan waivers.

As the owner of these banks, the government has a right to decide these policies, but, it also means that the high command approach still holds, and will continue to do so for the merged banks. Hence, while the concept of the so-called ‘phone banking’, which can be catastrophic, has been abolished; banks still have to adhere to these guiding orders, and will not be independent like their private counterparts.

A lot of changes will be seen in the governance structures, such as appointments to the Board, remuneration to Board members, review by the Board of all designations above general manager, etc. But, given that Board members would still be driven by the overriding instructions from above, it may not mean much, if the basic pillars of business guidance are fixed.

Also, it has been reiterated that the chief risk officer position would be mandatory, and there would be outside recruitment at market pay. Does this mean that PSBs with a total officer staff of over 400,000 do not have the talent to fix 12 posts in these banks? There is already quite a bit of ill-feeling on lateral recruitment of some tenure-driven posts in PSBs; this announcement can be more demoralising. Ideally, bringing in a performance-linked bonus for high performers would have the sent right signals in the market, and raised morale. This is definitely required to enthuse the staff of the merged banks, especially since there will be substantial disruption on account of the mergers.
Curiously, the new mosaic talks of willingness to pay non-official directors a higher sitting fee, but not the existing staff, who have built these banks over the years. This is something which should be addressed in course of time, and would also appeal to the Unions.

Now, coming to the idea of a merger, it must be realised that the overall balance sheet size cannot change with these mergers as there is still a fixed set of assets and liabilities. Statistically, ratios look better for the merged entity as it adds profits of strong banks to losses of weak banks. But, there is no new profit being generated anywhere. In fact, statistically, the ratios of NPA and capital adequacy of merged banks tend to be higher or lower than individual components of the entity.

Based on the dictum of one of the large business consultants in 1999-2000, we are following a model where the banking system has global, national, and more niche specific banks. The approach can be questioned in this modern age, where the focus is more on inclusive banking, with more sophistication in financial markets. Are we really saying that large banks created will be able to be in the USA what, say, Citi Bank is in India? There are regulatory barriers everywhere, and the approach, so far, has been to close down unprofitable foreign branches. In that case, what exactly are we talking of?

It has been argued that large banks with bigger capital can take larger exposures. But, is that what we want? RBI’s large exposure norms clearly want banks to lower their exposures to large borrowers in order to reduce concentration, and are being prodded to borrow from the bond market. In that case, this cannot be a goal for PSBs. Merging for the sake of merging banks, without changing the operational structures, may not necessarily lead to an optimal solution. True, any rationalisation in costs, like closing of branches or ATMs, can help the profit-and-loss account. But, the same could have been worked out between PSBs without such mergers, too, with, say, PNB not retaining a branch where OBC has one.

The fear, probably, with such large PSBs is that crises tend to get magnified. This has been witnessed in some banks at different points of time, but, being a relatively rare occurrence, is less of an issue. Alternatively, there should ideally be no pushing of programmes by the government on lending, or even schemes like Jan Dhan, so that banks take independent decisions, based on commercial logic. At the extreme limit, the push for SME lending, or affordable housing can germinate the seeds of a crisis (which may look unlikely today).

The timing of these mergers is also curious; almost all PSBs are struggling to come to terms with the existing NPA crisis. While NPA ratios have declined, at close to 10%, they are still very high. A large number of cases are pending with the IBC, which, in turn, quite expectedly, appears to have lost steam, with the realisation rates now coming down, after the initial success. Now, all would be working hard on these mergers, which take time to put together.
The contrarian may just argue, quite rightly, too, that there was really no immediate need of such big bang mergers—they could have been planned over a period of time to eschew disruption.