Mergers likely to help banking sector in the long run

Soon after the acquisition of the ailing IDBI Bank by insurance giant LIC, the government announced the merger of Bank of Baroda with two smaller banks not in the pink of health. The short-term profitability of the BOB will not be affected by the merger, but that the net assets of the three banks and the consolidation of branches and operations will be smooth and beneficial in the long run for the merged monolith.

Bank mergers have long been viewed with scepticism after the SBI shares and profits were pulled down following the merger with its five associate banks. Although the merger catapulted SBI to the ranks of the top 50 global banks in terms of assets, its NPAs rose from Rs 1.07 lakh crore to Rs 1.89 lakh crore after the merger, which was over 9 per cent of total advances. The real benefits of consolidation are long term after the branch reduction takes place and the cost-cutting follows after all duplicate operations and redundancies are rationalised.

Consolidation mooted long back

The consolidation of 21 public sector banks has been discussed ever since the Narsimham committee report was tabled during the early days of liberalisation in 1991. The banking sector reforms proposed by the former RBI Governor in 1991 and 1998 never took off because there was no political compulsion. Simply speaking, bank nationalisation was done because it empowered millions with banking facility and endeared Indira Gandhi to the masses. But PSU banks were out of focus post-Indira Gandhi and politicians found no reason to consolidate operations and nurture them.

But PM Narendra Modi’s politics is around banking the unbanked like Indira Gandhi. He has to nurture the PSU banks and make them healthy if they have to be milked for empowering the masses. For new social initiatives like Mudra loans, the PSU banks must be healthy. Turning the PSU banks healthy is no mean task because for decades NPAs had accumulated without stressed assets resolution.

When Raghuram Rajan tried to crack the whip on the banks under UPA II, he did not get political support. He was able to implement the Asset Quality Review norms for banks only in 2015 after which the Bank NPAs have steadily risen each quarter. The Insolvency and Bankruptcy Code IBC 2016 was thereafter put in place for resolution of stressed assets.

So, though NPAs have soared after 2015, the banks are writing off or selling its bad loans each quarter. Additionally, the weaker banks will be merged with the stronger banks to ensure that no bank becomes a liability that cannot be revived. But it is not only the weak bank with the strong bank that is going to be the consideration for mergers. There will be many other areas including the location of branches and type of advances that needs to be studied before the pairing of banks is done for the merger. Let us see why the Bank of Baroda, Vijaya Bank and Dena Bank have been paired for merger and how it should fair in the longer run.

Will merger lead to higher efficiencies?

The key issue will be whether the banks that are merging will be healthy, efficient and more viable in its operations than the current entities. Secretary Department of Financial Services Rajiv Kumar says “that the new entity is positioned for a substantial rise in customer base, market reach, operational efficiency and a wider bouquet of products and services for customers.” The merged banks will create the third largest bank in India with total business of Rs 14.82 lakh crore.

Each bank gains from the merger in some ways. The amalgamation will also give a chance for the consolidated bank to shut down the many branches that will become redundant after the merger. That will effectively cut costs and result in huge savings. For example, Vijaya Bank is traditionally strong in the southern states while Bank of Baroda is stronger in the west. Dena Bank has a very high number of branches that do little business. Each bank will have to rationalise its branches and shut down those which are doing less business at the same location. These are post-merger issues that need to be tackled with finesse, but the consolidation was overdue and the first target should be to bring down the 21 nationalised banks to anywhere between 6 to 10 amalgamated banks that are then nurtured back to health.

The writer is a senior journalist. Views are personal