Merger Of Public Sector Banks: Here Are The Key Merits

The dawn of the new fiscal year 2020-21 for the banking industry brings many challenges in near term and ample opportunities in long term.

In the midst of the fight against the unprecedented global coronavirus pandemic, going ahead with the consolidation of 10 public sector banks (PSBs) into four large entities is significant. This will go down in history for the implementation of one of the key pending recommendations of Narasimham Committee-I (1991-92).

Phasing out flab in the organisational structure, optimising branch network, better deployment of talent and, more importantly, acquiring robust risk management and lending capabilities are some of the intended merits in the long term.

The newly-formed 12 strong and smart PSBs should eventually be able to compete with new-generation peers. They should be able to raise the bar of performance in the inclusive journey of the banking industry.

New Pecking Order Of PSBs

Based on the business data of March 2019, State Bank of India (SBI), the banking behemoth, will lead the pack with business of Rs 52.05 trillion.

Punjab National Bank (PNB) will be the second big PSB after its merger with Oriental Bank of Commerce (OBC) and United Bank of India (UBI). The new entity will have a business level of Rs 17.94 trillion, leaving behind Bank of Baroda in third position with its business at Rs 16.13 trillion.

Canara Bank will stand at fourth position commanding a business of Rs 15.2 trillion. Union Bank, Andhra Bank and Corporation Bank together will reach a size of Rs 14.59 trillion.

Indian Bank and Allahabad Bank will make another smart PSB with business standing at Rs 8.05 trillion.

These business figures are likely to be different after the audited position of 31 March 2020 is finalised.

The consolidation is expected to attain better economies of scale with better operational efficiency. It will take considerable time for the new entities to command the patronage that they once enjoyed.

Coming to the strengths of the outgoing PSBs, the shareholders of merging entities will get shares as per merger ratios approved by their banks’ boards and government.

Since it is a strategic consolidation process initiated to trim down the number of PSBs, and to focus more on making them big and strong, the merger of any underlying PSB, as a consequence, does not necessarily reflect upon their operational efficiency.

For example, the shareholders of OBC will get 1,150 shares of PNB with which it is merged in lieu of its 1,000 shares, whereas UBI shareholders will get only 121 shares of PNB in lieu of 1,000 shares.

Continuity Of Customer Service

In order to maintain minimum disruption in service to customers, the technical integration of digital operating platform is important. It will ensure that the customers of merged banks are able to operate their accounts in the newly-formed PSB.

While lot of homework must have been done prior to the date of merger to ensure interoperability of bank accounts of customers, the interruptions will have to be handled with the collaborative support of merging banks and their vendors.

The ongoing lockdown and tendency of low footfalls will provide enough time for the new entities to initiate business process re-engineering so that operational procedures are synchronised with the merging entity.

The support of customers will be needed in near term to approach the parent branch for non-routine transactions. The digital outfits of any bank will be able to provide basic routine services; more so when interchange charges of ATM usage has now been temporarily dispensed with.

A quick capacity building and understanding each other’s operational nuances are necessary to ensure that initial pain points causing customer discomfort are minimised.

Harmony In Human Relations

The leadership at all levels of the newly-formed PSBs will have the tough challenge of winning the trust of employees of the merging PSBs by treating them with care and concern.

Behavioural aspects will be important to maintain harmony at various levels of management hierarchy. Over a period of time, the differences among employees may sink.

However, many PSBs went for speedy internal promotions of their employees after the consolidation plans were announced to protect their own interest.

There will not be much to offer for the new management except creating a friendly unbiased working environment and better subordinate-superior relationships.

Similarly, trimming down organisational structure and rationalisation of branch network will be an inevitable outcome of consolidation. This is the area where sensitivity in dealing with human relations will be explicable in positioning and deployment of unified responsibilities.

Many PSBs follow a three-tier structure – branch, controlling office and corporate office. Others still have a four-tier structure with geographical area control structure as an add-on.

Taking an unbiased view, the new PSB has to adopt a single policy in the best interest without upholding merging bank’s superiority.

The same collaborative view should be taken in merging and closing of multiple branches in the same location. Customer concentration and convenience of outreach should be the driving point in rationalising the branch network.

Way Forward

The new PSB regime can prove its worthiness and stand to the test of efficiency provided it removes the divide between the merged entity and merging entity as fast as possible.

Though all banks work in the same regulatory framework, the procedural and cultural divide is vast. It is a big challenge to bring them at par and quickly dissipate the differences in near term.

The challenge will be to tackle soft parts of merger dealing with mind integration than bringing physical infrastructure together.

If human aspects are dealt properly, the merits of consolidation can be harnessed eventually in terms of improved asset quality, capital adequacy, lending appetite and systemic controls.

The historic move of consolidation can be fruitful only if the newly-formed PSBs in collaboration with regulators and government can improve the effectiveness of corporate governance.