GS-III: Making the grand India PSB mergers work.

News

The initial enthusiasm of market analysts to the bank merger announcement is giving way to wariness and scepticism.

The procedure of Bank Merger

• An application for merger is submitted by the concerned banks to the Central Registrar of Cooperative Societies (CRCS).
• A copy of the application is also sent to Reserve Bank of India (RBI) along with valuation report and information relevant for consideration of the scheme of merger.
• The RBI then examines the scheme in respect to the interests of depositors and conveys its decision to the CRCS.

What is the rationale behind the mergers?

• It was the Narasimham Committee in the late 1990s that recommended consolidation through a process of merging strong banks.
• There are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand.
• Given this, the biggest plus of the mergers is that they will create banks of scale.
• According to the government, banks have been merged on the basis of likely operating efficiencies, better usage of equity and their technological platform.
• But the move marks a departure from the plan to privatise some of the banks or bring in strategic investors to usher in reform in the sector.
• The government has decided amalgamation as the “best route” to achieve banking sector scale.
• This is also expected to support the target of achieving a $5 trillion economic size for India in 5 years.
• However, mergers may not lead to any immediate improvement in their credit metrics.

How effective could the merger be?

• Bank consolidation is a good move towards improving efficiency of the PSBs.
• This would enable the consolidated entities to meaningfully improve scale of operations and help their competitive position.
• Given that the merged banks are on similar technology platform, the integration should be smoother.
• However, there may not be any immediate improvement in their credit metrics as all of them have relatively weak solvency profiles.

What are the challenges and priorities now?

• Mergers are driven by synergies in products, business, geographies or technology and most important, cost synergies.
• There may be some geographical synergies between the banks being merged now.
• But unless banks 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 becomes significant.
• Evidently, public sector banks are overstaffed.
• But 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.

Way forward:

While such consolidation can result in handsome productivity gains, what matters is the quality of execution by stable and committed leadership aided by shrewd and benign ownership.