Government announces plan to merge 10 PSBs to 4 to gain size: Eight questions on big bank merger exercise

At 4 PM on Friday, Union Finance Minister Nirmala Sitharaman announced a major bank merger exercise . Post-this, ten public sector banks will be amalgamated to four taking the total number of public sector banks to 12 from 27 banks in 2017. As part of the exercise, Punjab National Bank will absorb Oriental Bank of Commerce and United Bank, which will then become India’s second-largest bank after State Bank of India (SBI) with Rs 17.95 lakh crore business size and 11,437 branches. Similarly, Canara Bank and Syndicate Bank will be merged, Union Bank of India will absorb both Andhra Bank and Corporation Bank. Also, Indian Bank and Allahabad Bank will merge. Besides these mergers, the finance minister also announced a slew of governance reform steps in state-run banks, the most important one being the appointment of chief risk officers with market-linked compensation. This is a big positive for state-run banks. Till now, risk management has not been given adequate focus in government banks that reflected in their asset quality. [caption id=“attachment_5201561” align=“alignleft” width=“380”]  File image of Union Finance Minister Nirmala Sitharaman. PTI[/caption] The public sector undertaking (PSU) bank mergers are a long-pending step, no doubt. Five decades after nationalisation, it made very little sense to retain too many state-run banks competing in the same area and have failed to evolve as efficient banking companies. These banks continue to be at the mercy of the government for capital and many of them score relatively less with respect to efficiency when pitted against private rivals. With this merger, India will have at least six big banks in the public sector that can compete with large rivals both in the country and abroad for high-value lending. Even the remaining six can be clubbed together in the next round. Sitharaman also announced a rough break up of capital infusion intended for individual banks out of the Rs 70,000 crore announced in the 2019 Union Budget. There are a few questions, however, that arise in the context of these bank mergers: 1) Will these mergers make these banks strong? Most of these banks have high non performing assets (NPAs). As this report in The Hindu rightly points out, of the 10 banks being merged, nine have net NPAs of over 5 percent. This is with the exception of Indian Bank which has a net NPA below at 3.75 percent as on 31 March 2019. Among others, United of Bank of India has a net NPA 8.67 percent as on 31 March, PNB 6.55 percent, Oriental Bank of Commerce 5.93 percent, Canara Bank 5.37 percent, Syndicate 6.16 percent, Union Bank 6.85 percent. Andhra Bank 5.73 percent and Corporation Bank has 5.7 percent.

Merging these banks won’t make the NPAs disappear but it will be like bundling small problems into one big problem to deal with. Capital required to service these assets will be commensurately high.

2. Is there a real synergy here? Most of these banks, except the big ones, have a regional focus and have strongholds in respective areas. Their work culture is also shaped accordingly. The government has taken care of technology synergy by clubbing banks using the same technology platform, but what about the work culture and regional focus? 3) Why is a bank like Punjab National Bank (PNB), which has a history of poor governance and risk management enabling the likes of Nirav Modi to loot the bank for years, given the charge of hand-holding two other weak banks to better health and good future? 4) Isn’t the consolidation plan going against the policy of Reserve Bank of India and government’s own plan to give more bank licenses to increase competition and take banking to the far-flung areas of the country? 5) During the presser, Sitharaman assured that there won’t be job losses in the process. But what’s the plan for branches of merging banks overlapping in the same area? Suppose the merged entity retains all officers as it is, there will be overlapping of roles. One bank does not need risk officers or two treasury heads, for instance. 6) Has the government ensured that heads of anchor banks are in a position to lead these mergers? In some of these anchor banks, the term of bank chiefs are getting over by end-2019 or early 2020. A new appointee as bank chief will be walking into a tough spot as the individual will have a herculean task of merging three banks. 7) State-run banks have strong trade unions that command influential positions in the running of these entities and the policy formulation for decades. Has the government taken these employee unions into confidence?

Even the industry lobby, Indian Banks’ Association (IBA) regularly consult with trade unions to decide maters such as compensation and work hours, etc.  In a press release issued after Sitharaman’s announcement, the United Forum of Bank Unions opposed the move and threatened nation-wide agitations.

8. What happened to the promise of privatising these banks and the government’s commitment to get out of the business? During the presser, Sitharaman and the bureaucrats resent made it clear that there are no immediate plans on cards to cut government’s stake in these banks below 51 percent. The PJ Nayak committee which had submitted its report on banking reforms had clearly recommended that government has to lower stake below 51 percent and privatise these banks eventually. There is no progress on that front yet.