Successive committees and India’s banking regulator have for almost two decades highlighted the need for consolidation in the banking sector. The Narendra Modi government, which was politically best positioned to bring about this and other probably more significant management reforms in state-owned banks, did little in this direction for much of its tenure. There was first the merger of the subsidiaries of the State Bank of India with the parent bank, which wasn’t something much to write about.
This was followed by the ill-advised decision to make Life Insurance Corporation acquire majority stake in the practically failed IDBI Bank. But now comes the proposal for amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank, which will lead to the creation of India’s third-largest bank by deposits and advances. This seems a slightly more sensible move given that it involves the merger of the two small banks with a relatively bigger bank.
Moreover, Vijaya Bank and Dena Bank have reasonable presence in the southern and western regions, respectively, which should complement the more pan-Indian spread of Bank of Baroda. The combined entity will definitely be able to leverage the branch network and customer franchise of the individual banks, thereby addressing the problem of fragmentation that discourages efficiencies of scale and results in lower return on assets. The government has taken the first real step in this direction.
It is, of course, another thing that the move for consolidation should have come much earlier, along with recapitalisation and overhauling of the management structure of public sector banks. The government, instead, spent much of its energies on schemes such as Jan Dhan and Mudra and, of course, the demonetisation exercise. All these only added to the financial and functional stress on state-owned lenders, already weighed down by bad loans. The proposed amalgamation will be a big test for the government politically, with hardly seven months to go for the national elections. It will have to convince employees that the merger is in their interest and will not necessary lead to redundancies. Much of that can be addressed with enough attention and effort as the merger exercise of SBI’s subsidiaries with its parent bank showed last year.
But the larger question remains: Does this fit in with a future strategy for public sector banks? Will it mean the government allows them to run like competitive entities — with full autonomy for the management and boards? Boosting size through consolidation isn’t difficult, but that would be of little use if unaccompanied by governance and management overhaul. India needs efficient, competitive banks that do not burden the exchequer and will support industry when the economy is on the upswing.