Events & Issues
New
Delhi, 11 September 2019
Bank Mergers
WEAK MAY SINK STRONG
By Dhurjati Mukherjee
It has been reported that the GDP has grown
by only 5 per cent in the quarter ended June, which was the lowest level in the
past seven years. In such a situation, bank mergers have been announced to
create larger entities. A section of economists feel that mergers may
unavoidably disrupt their functioning and instead of smoothening the flow of
credit, this might just freeze credit flows for the time being. Although the Finance
Minister has promised no such disruption, such things do not exactly follow
dictates of ministers.
The total number of public sector banks is
now down to 12 from 27 two years ago. Optimists hope, and not without reason,
that the mergers will provide scale economies and improve the overall
management in the banks. Meanwhile the government has pledged Rs 70,000 crore
for bank recapitalisation, buttressing the bank mergers. However, it is
felt that only structural changes will ensure the health of the public sector
banks.
A section of experts feel that the danger of
mergers is that instead of lifting the weak, the weak ones may sink the strong.
Early this year, the strong Bank of Baroda was merged with the weaker Vijaya
Bank and Dena Bank but post merger performance shows little improvement. To
prevent this, there is need for giving more autonomy to banks and ensure that a
professional approach is followed. Moreover, political interference in
disbursement of loans should be completely stopped.
As per the mergers announced, Oriental Bank
of Commerce and United Bank will merge with Punjab National Bank to create a
bank with a business of Rs 17.85 lakh crore and 11,437 branches. The merger of
Syndicate Bank with Canara Bank will create the fourth largest public sector
bank with a business of Rs 15.30 lakh crore and a branch network of 10,324.
Andhra Bank and Corporation Bank’s merger with Union Bank of India will create
India’s fifth largest public sector bank with a business of Rs 14.59 lakh
crore. The merger of Allahabad Bank with Indian Bank will create the seventh
largest public sector bank with a business of Rs 8.08 lakh crore and strong
branch networks in the South, North and East of the country.
One needs to mention here that the Canara
Bank and Syndicate Bank – both being based in the state of Karnataka – will
take time to diversify and remain a south Indian entity. This may not be the
case with the merger of PNB with United Bank of India and Oriental Bank of
Commerce and also Allahabad Bank and Indian Bank.
Though it is felt that consolidation will aid
economies of scale for these banks, nonetheless, merger related issues could
impact interim profitability. Another aspect of the merger relates to what the
Bengal Chief Minister, Mamata Banerjee, observed: that in a federal structure,
it is imperative to consult the State governments and major political parties
before taking any decision. She also pointed that the merger of UBI with PNB will
lead to the latter’s headquarters moving out of Kolkata. Also after merger,
Allahabad Bank’s headquarters may shift from Kolkata to Chennai. Banerjee
voiced concern about the fate of employees in these two Kolkata-based
banks as after the merger of associated banks merged with SBI around 3500
employees had to opt for voluntary retirement.
Obviously, the biggest challenge in
implementing amalgamation of these banks is the integration of technology
platforms and managing Human Resources and cultural issues. The easiest step in
a merger is the combining of balance sheets and integrating the treasury. But
integrating two networks on different IT platforms into a common one is tougher
than setting up a new bank from scratch.
It may be recalled that Arundhati
Bhattacharya, the then chairman of State Bank of India, merged the associate
banks with itself. According to her, although the merging banks were associates
of SBI, each had their own culture and 242 pieces of technology that needed to
be integrated despite being on the same platform. Thus, merging banks is indeed
a tough issue and at least two years would be needed for the merged entities to
function as a composite whole. In fact, Bank of Baroda Managing Director had
said a a few months back that the core banking integration would take 12 to 18
months despite all banks using Finacle, the core banking product from Infosys.
Clearly, therefore these mergers may not be
all that easy and as well as attractive. Moreover, the thrust of enhancing
profitability of banks may not allow them to open branches in remote and
backward areas of the country where banking is a necessity. Added to this is
the need to give a thrust to priority sector lending instead of more and more
loans to business houses whose recovery has been found to be rather poor.
The banking system, it must be remembered, has
to follow a professional approach and directors in bank boards, who are
politicians, should not be allowed to interfere in internal matters of the
bank, specially when it comes to giving loans to the corporate. The government
has to give utmost importance to autonomy of banks and ensure that
professionalism is not altered in any way.
The viability and profitability of banks is,
no doubt, necessary but their role in economic development of the Economically Weaker
Sections (EWS) has to be given top priority. It was because of this former
Prime Minister Indira Gandhi nationalised banks to ensure that these played a
key role in reaching the rural sector where majority of the country’s
population lives. Further, while banks
may focus on profitability all the time, these should not forget or ignore the
social objectives of public sector banks.
Some analysts compare PSBs with private banks
to show how the former is less profitable. The latter banks have very little
social objectives to perform as a result of which their profitability remains
quite high. In the coming years, the PSBs would have to combine profitability
with its social objectives and at the same time, try to remain competitive in
the market. This would be possible if they retain their professional spirit,
far away from the machinations of businessmen and politicians.---INFA
(Copyright, India
News & Feature Alliance)
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