Editorial Today – Bank Consolidation

What is Bank Consolidation? It means merger of banks.

What is the need of Bank Consolidation? Large bank would have sufficient lending capacity to fund large corporate as India Inc expands.

When it was decided? Gyan Sangam Bankers retreat.

What is Gyan sangam A Bankers retreat.

How consolidation would be done? Through anchor banks.

Key for successful merger Cost rationalisation, geography, etc.

Challenges Employee Union, Orientation of bank, etc.

Arguments in favour of Consolidation Efficient use of capital, reducing cost of business, etc.

Arguments against consolidation Large banks are not always good.

What is Bank Consolidation?

It means merger of two or more banks.

What is the need of Bank Consolidation?

At present there are 27 Public Sector Banks in India. But none of the bank is so large so that it could match the largest Bank of the world. For example India’s largest Bank State Bank of India is not even among top 50 largest bank of the world.
At present, public sector banks are fighting with each other for market share, but with so many payments and small finance banks coming in, the need is to consolidate and focus on strengthening the balance sheets to create big banks.
A consolidated Indian banking structure would be a positive development in the long term for the Indian banking system as strong banks rather than a numerically large number of banks would be beneficial.
Large bank would have sufficient lending capacity to fund large corporate as India Inc expands and extends its global reach.
Merger has been started with the merger of SBI’s five associates bank and Bharatiya Mahila Bank with State Bank of India (SBI)

When it was decided?

Though consolidation among public sector banks has been under discussion for about a decade now, but recently idea of bank consolidation was discussed at length during the ‘Gyan Sangam’ bankers’ retreat at Gurgaon in 2016.

What is Gyan sangam

A retreat has been held to take forward the Government’s commitment to reforms in the banking and financial sector. The growth and change in the financial sector ought to be in tune with the development in the real sector.
It was the second Gyan Sangam.
It focused on consolidation.

How consolidation would be done?

The government will identify six to ten public sector banks (called as anchor bank) which will drive the consolidation process among the state-owned banks. Large lenders like State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB) and Canara Bank could become the anchor banks.
The Bank Board Bureau headed by former Comptroller and Auditor General (CAG) Vinod Rai, which was recently formed to select chief executives and board members of public sector banks, will also help in the consolidation process.

Key for successful merger

Cost rationalisation (cutting down branches, particularly in urban areas where there are too many branches of different banks in the area)
Banks from different geographies should be chosen for mergers (North Indian bank + South Indian Bank)
But some economist feels that merger should take place between same geographical area as integration of human resources and their culture will also be easier if banks are merged from the same geographies. And merger of large bank and small bank will be more effective in urban area not in rural area.
The other criterion to identify banks for mergers is the technology platform. Different banks have different platform developed by IT majors. To merge two banks having different platforms could lead to challenges during integration.
Employee union should be taken into confidence.

Challenges

One of the toughest challenges that the government will face while merging banks is from the employee unions and the employees who may fear identity loss. The unions have already started opposing the proposed privatization of IDBI Bank, in which the government said it would consider lowering stake below 50 per cent.
There are challenges at the higher echelon levels too as there will be duplication of positions. There will be multiple CMDs and MDs and EDs who have to be sifted, and this will entail a lot of pain as some may have to leave.
Orientation of banks is different. Some are more into rural banking while others have a strong industrial or infrastructure proclivity. Hence, besides looking at performance indicators, the business blend of such mergers has to be judicious, else, we will be concentrating risk in some areas.

Arguments in favour of Consolidation

Capital can be used more efficiently. The merged entity will have more leg-room to raise capital
It will reduce cost of doing business.
Technical inefficiency is one of the problems of bank especially with small banks. After merger the larger bank would be able to tackle this.
It will help bank to expand its reach and thus cater to more people. Thus agenda of financial inclusion would be fulfilled.
Larger banks will ensure investment in large scale infrastructural projects and those projects which have large gestation period.
To tackle Non performing asset (NPA) problem the government is resorting to capital infusion. Consolidation will increase capital efficiency, apart from improving the ability of banks to recover bad loans. Thus the burden of the government to recapitalise it again and again will reduce.
At a time when NPAs are high, and banks are putting more effort in recovery, the ability to recover by smaller number of banks will be higher though a individual bank’s exposure may go up. This is because there are smaller number of voices … in the joint lenders’ forum today there are too many voices and each lender has a differential right with the borrower and they often not agree to a common recovery programme. With consolidation the recovery will be far more focussed
It will ensure Capital Adequacy Ratio according to Basel III norms. As a result the ratings of Indian bank would also be higher.
Presently a large number of banks are located at a particular location mainly in cities whereas on the other hand most of rural area doesn’t have a single bank branch. Consolidation will help in locating branches to the neediest area.
For customers, the shared infrastructure will come as a big plus. For instance, there will be no cross-bank ATM usage fees between the merged banks.
Most of these public sector banks have local characteristics. For instance, the Indian Bank’s reach in the country’s southern region is far greater than that of a north-India headquartered bank. Mergers will allow customers use of the network. Customer service interface will further improve to be best-in-class and this will help both depositors and borrowers.
A combined entity will have more cash in hand. Logically, this should help in keeping borrowing rates low since the cash is likely to be lent out to individuals and companies, instead of being kept idle in the reserves.
Customers of smaller banks will get access to wider use of financial instruments like mutual funds and insurance products that most big banks offer

Arguments against consolidation

India right now needs more banking competition rather than more banking consolidation. In other words, it needs more banks rather than fewer banks.
The merged State Bank of India is likely to be five times larger than its nearest competitor in terms of balance sheet size and one bank will now dominate the Indian banking landscape.
India is right now seeing the creation of new banks (eg payment banks and small finance banks) that could add to variety in the domestic financial system. These new banks should make the Indian loan market more competitive. The decision to merge the large public sector banks does exactly the opposite.
Large banks are not always good. For example during 2008 global crisis larger bank collapsed whereas smaller banks survived because smaller banks generally cater to small area and thus the risk is less. A few large inter-linked banks expose the broader economy to greater financial risks.
Human resource issues like regional allegiances, ensuring employees fit in with the new culture, and chalking out a career path for them in the merged banks all need to be handled with care.Intra-organisation growth is generally quicker in a smaller company. A merger could hurt career prospects of those working in smaller banks.
Many smaller banks will lose local characteristics, which customers preferred because of cultural affinity.