It has been more than 27 years since a committee headed by Reserve Bank of India (RBI) Governor M Narasimham first made out a case for pruning the number of government or state-owned banks. That committee, which was appointed in 1991 by Manmohan Singh who was then Finance Minister, had recommended a restructuring of Indian banks, with three or four large banks including State Bank of India that could be positioned as global banks, besides eight to ten with a national footprint or presence, rather than having over two dozen state-owned banks.
On Monday, after the weekend firefighting measures on the rupee front, the government announced the amalgamation of three banks — Bank of Baroda, Vijaya Bank and Dena Bank — aimed at creating the country’s third largest bank with a business of Rs 14.82 lakh crore and over 9,600 branches across the country.
For long, it has been recognised that having several banks that are majority-owned by the government, virtually doing the same business, and competing for the same pie of customers wasn’t a sensible strategy. It also meant a lower return on the capital employed by the government which has competing demands for funds, and growing competition. The government and banking regulator RBI have also emphasised the changing face of banking marked by technological changes; challenges to raising capital that the owner (the government) has to provide periodically; the need for consolidation in the sector and putting an end to fragmentation.
In the early phase of the UPA government, there were attempts to merge a couple of banks but the move had to be abandoned as the government baulked, anticipating political resistance. In 2016, Finance Minister Arun Jaitley said that the government would pursue consolidation after first pumping in more capital and putting back on track many banks weighed down by a huge pile of bad loans. To facilitate this, the government last year put in place an Alternative Mechanism on bank mergers, essentially a group of senior ministers led by the Finance Minister to approve mergers. The first such proposal was the one that was announced Monday.
Then & now
In a coalition like the UPA in the past, getting such a proposal through may have been difficult. The NDA government has the strength of numbers, and may also have been emboldened, perhaps, by the experience of the merger of five susbidiaries of the State Bank of India last year to create an entity with a size of over Rs 44 lakh crore — way ahead of the rest of the banking pack. More importantly, the weak state of some of the banks may have been the tipping point. That’s the difference between the attempts in 2007-08 and now — at that time the proposal involved a merger of two strong banks riding the wave of growth, but this time it will feature at least one very weak bank — Dena Bank, which has severe restrictions on lending and expanding its business. For long, governments have said while they would welcome consolidation, they would prefer the banks themselves to make merger moves and get these approved by their boards. This time, the government appears to have made that decision; reports indicate that the bank managements were informed very late.
When private lender GTB was in trouble over 15 years ago, the regulator and the government settled on state-owned Oriental Bank of Commerce to step in. There were also the case of United Western Bank and IDBI, Bank of Rajasthan and ICICI Bank, and HDFC Bank and Bank of Punjab. But in terms of scale and common ownership, the latest proposal stands out.
How it should help
Mergers are often advocated on the basis of synergies. These could be in terms of operational efficiency with a large pool of staff in a merged entity being put to work for boosting business, expanding reach and offering more services or products. On a standalone basis, Vijaya Bank had strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers. From the government’s and regulator’s point of view, the move will lead to a lower NPA (non-performing assets) ratio for the new bank compared to the NPA ratios of 11.04 % for Dena Bank, 5.40 % for Bank of Baroda and 4.10% for Vijaya Bank. What this could mean down the line is lower requirements of capital from the government and also the ability of a large bank, like the one proposed, to lend more on the strength of its higher capital base (12.25 %) and to expand business, rather than being dragged down because of weak financials and being forced not to lend.
The boards of all three banks, being public listed entities, will meet soon and try and get approval for the government proposal. That should not be a problem given the government has the dominant shareholding in all three.
The challenge is integration in a new entity, whether in operations or culture. It helps that the three banks chosen have a common technology platform, which may make it work like in the case of the SBI and its subsidiaries. Human resources can often be a deal breaker: contrasting HR practices and aligning these with employee expectations or aspirations will also test the new management. The other major test will be leadership — choosing one of the CEOs to head the new bank and with a reasonable tenure. Besides that will be addressing the concerns of unions and shareholders.