Bank Mergers: Nothing Is As Wasteful As An Idea Whose Time Is Gone 

Victor Hugo said that “nothing is as powerful as an idea whose time has come”. By this token, one wonders why an idea mooted as far back as 1991-92 should be something whose time has come 28 years later in 2019.

In 1991-92, the M Narasimham Committee had recommended that that India’s public sector banks must be merged and consolidated into three or four big international banks and a few national ones, with the rest being downsized to remain as regional banks.

This idea has been realised only now, with the Narendra Modi government in its first term merging State Bank of India (SBI) and its subsidiaries and Bank of Baroda with Vijaya Bank and Dena Bank. The second round of mergers comes early in Modi’s second term, with the announcement of four more mega mergers: Punjab National Bank with Oriental Bank and United Bank, Canara Bank with Syndicate Bank, Indian Bank with Allahabad Bank, and Union Bank with Corporation Bank and Andhra Bank. After these mergers are concluded, the resulting four banks will have a combined business size of Rs 57.81 lakh crore – roughly equal to that of the SBI (over Rs 52 lakh crore now).

These banks collectively account for a huge share of domestic business, but the mergers are essentially a bet on size and scale rather than focus and profitability. In the new world of digital banking – where branches, ATMs, and even credit and debit cards may become irrelevant – size and scale may no longer be all that important to success.

If a Paytm Payments Bank can literally garner over 100 million customers for its wallet and banking operations with practically none of the above overheads, one wonders why mergers are going to do anything great for the 10 public sector banks being merged into four.

The mergers, which could take upto a year to formalise, and possibly another year to digest, come with the following demerits.

First, despite the huge dollops of capital infusion, the mere fact that they are to be merged will shift management focus from growth to internal issues like culture, pay fitments, and branch rationalisation. Hardly, the most conducive way to boost credit growth and investment. The technology platforms are said to be compatible, but integration will still take many months and customers will find the changes disruptive in the short run.

Second, if the next two years are going to be about internally-focused issues, it automatically rules out any possibility of offering these banks for strategic sale even if the government wants to do so. This option may still be available for the six banks still left out of the merger process – Bank of India, Central Bank, Uco Bank, Indian Overseas Bank, Punjab & Sind Bank, and Bank of Maharashtra – but nothing that Finance Minister Nirmala Sitharaman said when she announced the mergers last week even indicated that privatisation was even under consideration.

Third, since no labour redundancies are planned, there is no immediate cost reduction possible. In fact, costs could rise, since those banks with slightly lower pay grade will need to be upgraded to the highest levels. Synergy gains will come only from merging common treasury operations and rationalising branches and ATMs – which could take time.

Fourth, the problem with all the banks being merged is that their collective size is not resulting in even comparable valuations. While Bank of Baroda, which swallowed up Vijaya Bank and Dena last year, is valued at all of Rs 35,000-and-odd crore now, the market values of the 10 banks being merged now is less than Rs 1.2 lakh crore – less than half that of SBI, and one-fifth that of HDFC Bank (over Rs 6 lakh crore). The difference in how the market sees HDFC Bank and the public sector banks. It indicates the difference in the competitive abilities of the two sets of banks.

Punjab National Bank, after its merger with Oriental Bank and United Bank, will have a total business of Rs 17.94 lakh crore – almost similar to HDFC Bank’s Rs 17.50 lakh crore – but the combined market valuation of the three merging banks will be less than 8 per cent of HDFC Bank’s.

This is because public sector banks are capital guzzlers – government has pumped in more than Rs 2 lakh crore over the last two years into them – in contrast to private sector banks, which usually manage to generate most of their growth capital from profits.

Fifth, if we assume that change in slower in the public sector than in the private sector, it means the rate of adaptation to a digital future will be slower in the merged or merging banks than in their competitors. This means, public sector banks could slip further from their competitors.

With four mega mergers taking place, the Finance Minister needs to ask herself a simple question: is she ready to keep pumping taxpayer money in the coming years, now that privatisation no longer seems a viable option?

Few bankers, foreign or domestic, will touch a public sector bank with a bargepole even if they were offered it for a song.

Nothing is as problematic as adopting an idea whose time is gone. The era of public sector banking is truly over, and even privatisation will not rescue it.