The Great Indian Bank Merger - Intent & Capability
The idea of bank mergers floated since 1998, when 2nd M. Narasimham Committee recommended the government to merge banks into three-tiered structure —
o Three large banks with an international presence at top,
o Eight to Ten national banks and
o A large number of regional and local banks.
The SBI (with it’s associates) in 2017 has entered the league of “Top 50 Global Banks” with a balance sheet size of Rs. 51 Lakh Crore. This was the first ever large scale consolidation in the Indian Banking Industry.
However, despite consolidation and merger among the public sector banks in the last two years, Situation will not change much. After the recent round of consolidation, SBI will be remotely followed by PNB (Rs. 18 lakh crore), Bank of Baroda (Rs. 16.1 lakh crore), Canara Bank (Rs. 15.2 lakh crore) and Union Bank India (Rs.14.6 lakh crore).
Conventionally, the motives for bank mergers falls into three major groups:
A) Cost Benefits
B) Revenue Benefits
C) Economic conditions & other motives (valuation, managerial benefits, pre-empting possible takeovers, etc).
Conventional Theories
Major theories behind these mergers are Bad Loans, Profitability and a slight excuse of Basel III norms.
Bad Loans - If it is about bad loans, then Gross NPAs for the system as a whole fell from an average 43 per cent in 2013 to 24.1 per cent in 2018 with similar decline seen in nationalised banks (42 to 24 per cent) and in private banks (26 to 18 per cent) that reveals the issue is more systemic in nature than ownership specific.
About choice of targets, Andhra and Corporation reduced NPAs by Rs. 9,972 crore in FY18 on a combined NPA portfolio of Rs. 34,714 crore, whereas Union Bank with whom these two were merged could reduce Rs.3,476 crore on a total bad loan portfolio of Rs. 33,712 crore.
Profitability - Clear disconnect in profit criteria as well. The losses of Dena and Vijaya at Rs.3,721 crore during 2016-18 were less than those of Bank of Baroda at Rs.7,828 crore; that of OBC and United, at Rs.8,701 crore, lesser than the Rs.16,256 crore of PNB; and Syndicate’s, at Rs.4,683 crore, lesser than Canara’s Rs.7,034 crore.
Basel III - The merged banks had Basel III capital ratios of 9-11 per cent that does not cause an immediate threat. Vijaya Bank’s Basel III CRAR of about 14 per cent is higher than that of many other banks with no record of loss since 2005, yet became a target of merger. Whereas Indian Bank, considered a basket case a decade back, has become suitable enough to absorb another PSB. The metrics for merger should have gone beyond these theories.
Government’s Intent
While this would be an uphill task to chalk down the real intent behind these mergers as there could be a ‘combination of many’. Since all the major theories have some or other disconnects, I thought to go little deeper into it . After comparing balance sheets of PSBs, Private and Foreign Banks, could figured out one major difference, “Per Employee Profitability”.
There are 26 Public Sector Banks (PSBs) operating over 70,000 branches with combined employee strength of about 8 lakh across the country. Business and Profitability per employee at these PSBs are much below the national average.
The Reserve Bank of India report in the previous fiscal year also reveal that employee contribution to the SBI’s Profit was Rs.6.5 lakhs.
Competency is an inherent quality that constitutes the development of human resource in the organization. Human resource competencies differ from individual to individual. The variations in the competencies will arise depending on the type of organization where they are working and it is quite evident in Indian Banking system.
There is a clear need for structural reforms to improve the performance of PSBs. Though none bought the view that mergers were a reform measure, what has gone unnoticed are the structural reforms FM unleashed. For instance, management accountability is tied to bank boards, chief risk officers will be recruited at market-linked compensation, risk management committees will have fresh mandates, succession planning is given thrust, and many more.
The governance reforms are a step in the right direction to improve the overall functioning of PSBs. If the specific measures related to:
1) Leadership development;
2) Strengthening the board committee system;
3) Enhancing the effectiveness of the employees ;
4) Empowering the board
are implemented effectively and are supplemented with adequate resources and persistent commitment, they will go a long way in addressing many of the issues that have plagued these banks historically.
