It has been reported that the GDP has grown by only 5 per cent in the quarter ended June, which was the lowest level in the past seven years. In such a situation, bank mergers have been announced to create larger entities. A section of economists feel that mergers may unavoidably disrupt their functioning and instead of smoothening the flow of credit, this might just freeze credit flows for the time being. Although the Finance Minister has promised no such disruption, such things do not exactly follow dictates of ministers.
The total number of public sector banks is now down to 12 from 27 two years ago. Optimists hope, and not without reason, that the mergers will provide scale economies and improve the overall management in the banks. Meanwhile the government has pledged Rs 70,000 crore for bank recapitalisation, buttressing the bank mergers. However, it is felt that only structural changes will ensure the health of the public sector banks.
A section of experts feel that the danger of mergers is that instead of lifting the weak, the weak ones may sink the strong. Early this year, the strong Bank of Baroda was merged with the weaker Vijaya Bank and Dena Bank but post merger performance shows little improvement. To prevent this, there is need for giving more autonomy to banks and ensure that a professional approach is followed. Moreover, political interference in disbursement of loans should be completely stopped.
As per the mergers announced, Oriental Bank of Commerce and United Bank will merge with Punjab National Bank to create a bank with a business of Rs 17.85 lakh crore and 11,437 branches. The merger of Syndicate Bank with Canara Bank will create the fourth largest public sector bank with a business of Rs 15.30 lakh crore and a branch network of 10,324. Andhra Bank and Corporation Bank’s merger with Union Bank of India will create India’s fifth largest public sector bank with a business of Rs 14.59 lakh crore. The merger of Allahabad Bank with Indian Bank will create the seventh largest public sector bank with a business of Rs 8.08 lakh crore and strong branch networks in the South, North and East of the country.
One needs to mention here that the Canara Bank and Syndicate Bank – both being based in the state of Karnataka – will take time to diversify and remain a south Indian entity. This may not be the case with the merger of PNB with United Bank of India and Oriental Bank of Commerce and also Allahabad Bank and Indian Bank.
Though it is felt that consolidation will aid economies of scale for these banks, nonetheless, merger related issues could impact interim profitability. Another aspect of the merger relates to what the Bengal Chief Minister, Mamata Banerjee, observed: that in a federal structure, it is imperative to consult the State governments and major political parties before taking any decision. She also pointed that the merger of UBI with PNB will lead to the latter’s headquarters moving out of Kolkata. Also after merger, Allahabad Bank’s headquarters may shift from Kolkata to Chennai. Banerjee voiced concern about the fate of employees in these two Kolkata-based banks as after the merger of associated banks merged with SBI around 3500 employees had to opt for voluntary retirement.
Obviously, the biggest challenge in implementing amalgamation of these banks is the integration of technology platforms and managing Human Resources and cultural issues. The easiest step in a merger is the combining of balance sheets and integrating the treasury. But integrating two networks on different IT platforms into a common one is tougher than setting up a new bank from scratch.
It may be recalled that Arundhati Bhattacharya, the then chairman of State Bank of India, merged the associate banks with itself. According to her, although the merging banks were associates of SBI, each had their own culture and 242 pieces of technology that needed to be integrated despite being on the same platform. Thus, merging banks is indeed a tough issue and at least two years would be needed for the merged entities to function as a composite whole. In fact, Bank of Baroda Managing Director had said a a few months back that the core banking integration would take 12 to 18 months despite all banks using Finacle, the core banking product from Infosys.
Clearly, therefore these mergers may not be all that easy and as well as attractive. Moreover, the thrust of enhancing profitability of banks may not allow them to open branches in remote and backward areas of the country where banking is a necessity. Added to this is the need to give a thrust to priority sector lending instead of more and more loans to business houses whose recovery has been found to be rather poor.
The banking system, it must be remembered, has to follow a professional approach and directors in bank boards, who are politicians, should not be allowed to interfere in internal matters of the bank, specially when it comes to giving loans to the corporate. The government has to give utmost importance to autonomy of banks and ensure that professionalism is not altered in any way.
The viability and profitability of banks is, no doubt, necessary but their role in economic development of the Economically Weaker Sections (EWS) has to be given top priority. It was because of this former Prime Minister Indira Gandhi nationalised banks to ensure that these played a key role in reaching the rural sector where majority of the country’s population lives. Further, while banks may focus on profitability all the time, these should not forget or ignore the social objectives of public sector banks.
Some analysts compare PSBs with private banks to show how the former is less profitable. The latter banks have very little social objectives to perform as a result of which their profitability remains quite high. In the coming years, the PSBs would have to combine profitability with its social objectives and at the same time, try to remain competitive in the market. This would be possible if they retain their professional spirit, far away from the machinations of businessmen and politicians.