August 13, 2022
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
The government wants to kickstart the next round of public sector bank mergers hoping, ultimately, to have only four or five such banks but each one as large as the State Bank of India. This follows a detailed study of the outcome of such mergers. As of now, India has seven large public sector banks – or PSBs – and five smaller ones. What will such mergers mean for the banking sector and depositors like you?
The government has begun consultations about the mergers by asking the banks in question to submit their feedback and there will be more talks with the Indian Banks’ Association. The mergers, if they happen, will be in line with the policy begun in 2019 when the Centre announced the merger of 10 PSBs into four, reducing the number of government-run banks from 27 to 12.
Among those merged were the United Bank of India and Oriental Bank of Commerce into the Punjab National Bank; Syndicate Bank with Canara Bank; Allahabad Bank with Indian Bank; and Andhra Bank and Corporation Bank with the Union Bank of India. Dena Bank and Vijaya Bank, meanwhile, were merged with the Bank of Baroda.
It’s not just mergers but also the privatisation of PSBs that’s on the cards. The government spoke of privatising two PSBs in the last Budget but that might involve more consultations with stakeholders. The most likely candidates are the Indian Overseas Bank and the Central Bank of India, based on Niti Aayog suggestions.
The Finance Ministry is also speaking to the Reserve Bank of India on the mechanism of bank privatisation. The government’s argument has been that privatisation and mergers will make banks financially secure and lead to consolidation in the banking sector.
Accordingly, the merits of such a move and learnings from the earlier mergers are being studied. This assessment will, presumably, look at areas such as bad loans, credit flow, profitability, cost reduction and resources.
Supporters of the move say that the mergers have laid the groundwork for consolidation of the sector and that it’s now time to ramp up the effort. They claim that the advantages are huge in terms of optimising the number of branches and accelerating the shift towards digital banking. This, they say, will lead to a drop in costs, a rise in profitability and a massive improvement in services and customer experience. In addition, they argue, this would make banks fiscally stronger and enable PSBs to compete better with not just Indian private banks but also foreign ones.
However, not everyone thinks it’ll be smooth sailing. According to a McKinsey study, only 30% of mergers attain the synergies presumed at the start. Research by other agencies has shown that the success rate is less than 20% in such mergers and that, historically, most bank mergers have not led to greater profitability. In fact, in most cases, net profit to total income, interest income, total assets and net worth weakened after the mergers. Such mergers don’t overcome bad loans either. Case in point: the bad loans of the State Bank of India have only widened after it amalgamated five associate banks into itself.
There are other voices of warning. Former RBI governors YV Reddy, D Subbarao and Raghuram Rajan have also warned against consolidation as a cure for our banking troubles. Rajan prefers merging only weak banks and only after their fiscal health improves. Remember, it’s not just about projected or hoped-for numbers. Each of these banks has its own organisational culture and sudden mergers could result in serious operational problems. These include areas like process integration, branch rationalisation, human resource management and investor protection. Amalgamations with weaker banks will hurt the recovery of healthier banks.
Instead of mergers, there could be other solutions. For instance, the government could start development banks to finance infrastructure and unburden PSBs of this task. There is also an urgent need to refine PSB governance and for the government to refrain from loan write-offs, especially to large corporations.
Bank unions, meanwhile, are edgy and vociferously oppose the mergers and privatisation of PSBs. They point to the adverse impact on job opportunities and customer services, and problems with IT integration. They allege that senior bank officials are telling the government what it wants to hear, that things are great inside the merged PSBs, but the ground reality is different.
They say the mergers have been a failure, and that they have made little difference to the services offered. In fact, they say, the challenges have only increased. The unions claim that the mergers are only a prelude to privatisation. As proof, they point out that 7,800 branches of PSBs have been shuttered while private banks have opened 4,500 branches – mostly where PSB branches used to be.
You might argue, with some merit, that banking is among the many businesses the government shouldn’t be in. However, a country like India needs a government banking system for various reasons – from the large number of unbanked people to the need for financial inclusion and credit and services to the people private banks don’t wish to service. What is the guarantee that these PSBs, once sold, will continue extending unprofitable but critical services to these customers? The government can’t seem to think beyond cashing out but what about the downside? And if the whole thing ends badly, guess who’ll pay the price. It’ll be you.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at firstname.lastname@example.org. Catch you again soon.