Business

High expectations from bank mergers

— PHOTO: AKHILESH KUMAR

PROTEST: Employees of State Bank of India protesting against the merger of State Bank of Saurashtra with SBI.

The merger of State Bank of Saurashtra with State Bank of India has been on the cards for quite some time. Yet even after the government finally gave the go ahead, a formal merger seems some distance away. The managements at Bhavnagar for SBS and in Mumbai for SBI seem to be groping in the dark about the procedures to follow.

Meanwhile, sections of bank employees have struck work for two days last week protesting the merger. Despite claims to the contrary, the takeover by the country’s largest bank of one of its associates is being dictated by the government, which hopes that a successful merger will be a trend setter not only for the SBI group but for other public sector banks as well. The other six associates of SBI — State Bank of Mysore, State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Indore and State Bank of Travancore — can then be amalgamated with SBI.

It will be naive for the government or anyone else to think that consolidation within the SBI group is easy. Despite a common brand, common directors (the SBI chairman is the ex-officio head of all associates) and close integration of banking procedures, there are significant differences within the group. Many of these are rooted in history. These banks from the former princely states have retained their unique identities. For a long time, SBI allowed them to flourish in their respective regions and did not have its own branches even in the bigger cities there. Besides, there are significant differences in staffing patterns. Integrating the human resources structure is a thankless task post-merger. Not to be forgotten is the fact that while SBI holds all the capital of SBS some other associates are listed. Where outside shareholders are present, naturally, the merger process becomes more complicated.

Even assuming that SBI manages to merge all its associates with itself, there will still be a number of government-owned banks functioning separately. The ultimate objective is to bring about a massive consolidation in the public sector dominated banking industry by persuading the government-owned banks (even those outside the SBI fold) to merge with one another. The expectation is that after the consolidation, four or five large banks will remain on the scene, ready to take on international competition. That in any case was what the Narasimham II Committee on financial sector recommended way back in 1997. However, despite the government’s enthusiasm, very few mergers have taken place either within or outside the government’s fold. All the 27 government-owned banks continue to retain their individual identities and remain a heterogeneous bunch. Even the smallest among them has not thought it fit to merge with a bigger bank. Inorganic growth is simply not possible for public sector banks even with active prodding by their biggest shareholder, the government. Leaving out some well publicised initiatives in the private sector — the merger of Centurion Bank of Punjab with HDFC Bank being the latest — most mergers have taken place at the instance of the government. Earlier, the government-owned Oriental Bank of Commerce was asked to take over the failed Global Trust Bank and Punjab National Bank, the Nedungadi Bank. The government was trying to avert a possible loss of confidence in the financial system caused by such failures.

Trade union opposition to mergers among PSBs is valid even if it has been on predictable lines: that a closure of redundant bank branches may lead to fewer jobs in the long run. Also, despite the government’s assurance of job security immediately after the merger, a combined entity will still find it difficult to utilise the enhanced manpower.

Second, though size is important, even a merger of two or three large and medium sized banks cannot create an entity big enough to face the global giants. More recent developments in the U.S and other developed countries prove the point that large size of a financial institution does not automatically vouch for sound management. The world’s biggest banks are reeling under the impact of the serious crisis in the financial sector, largely their own creation.

Two other points are relevant to a debate on mergers leading to consolidation in the sector. One, in the reform era, a large network of branches need not necessarily be considered a strength. Other delivery channels such as internet/phone banking are becoming important. In technology related areas, a merger by itself will not contribute much. Bringing together PSBs is bound to lead to redundancy of bank offices, especially in the metros. Second, the official fascination with mergers is based on the belief that the future of banking lies in universal banking. The assumption is that many more financial services besides the basic ones can be undertaken by a larger entity after merger. The fallacy in this argument is this. While some three years ago banks in India were fascinated with the universal banking model and wanted to offer several non-traditional products as well, today there is much less enthusiasm. Some of the risks involved in the ‘newer products’ such as credit cards are becoming all too apparent for the PSBs. Stock market operations are another vulnerable area.

Expertise in such areas is hard to come by. In any case, having a common brand serves the same purpose. The SBI logo is adopted by all its associates. A formal merger does not confer any special strengths.

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