#dnaEdit: Autonomous consolidation

Consolidation of banks is not a new idea. Though the practice is somewhat in vogue, it has been talked about much before. Of late, there has been increasing talk of the Union government actively pursuing merger as a way of consolidating public sector banks.  If we really believe in free market economics, mergers should happen because of market compulsions rather than under government direction.  What we are currently witnessing, however, is a government directed process of mergers and acquisitions among banks. Arguing that government ownership of banks entitles it to direct their amalgamation and merger is simply poor logic or flawed policy framework.

Currently, the Reserve Bank of India is in the midst of an exercise to identify “systemically important banks” or D-SIBs. This, in plain language, means identifying large banks whose failure — because of their size — would disrupt the Indian financial system. A concept that is similar to the “too big to fail” concept, in vogue, during the global financial meltdown. In the Indian context, the State Bank of India (SBI) surely is a D-SIB. Under the present plan, the SBI  will be expected to merge within itself many other banks. However, this process would spawn entities which could aggravate financial problems. Ideally, the  policy should be to not encourage having such D-SIBs because their failure as viable operations would require government to rescue them. Recall in this context, the US government’s experience during  the Lehman Brothers crash.

There are hidden dangers in the process now under consideration. If past experience is of any relevance, the merger of New Bank of India with Punjab National Bank was far from easy. The integration of the two organisations took years, besides the process hurt  the employees of the merging entity, who contested the benefits acquired by the employees of the parent bank.  A general manager of New Bank of India ended up  handling businesses far smaller than the manager heading  an average branch of the Punjab National Bank. Given that the competencies of the staff were unequal, achieving parity was indeed difficult. 

Consolidation of banks under government direction is surely not the remedy for the ills of India’s public sector banks. If anything, government is responsible for landing the banks in a spot. Government decides the composition of the apex boards; it appoints the higher banking executives, it gives direct guidance for loans, besides browbeating bank managements. Little wonder that the top managements of PSU banks have performed so miserably.   

Bank mergers was often an idea that was leveraged by  the UPA government, if only  to extricate itself from a messy situation. The new government should think through this proposal before executing it.

 Maybe, it should give time to the  banks to restructure their finances and extend support for rebuilding their balance sheets. The banks  may also be given the opportunity to raise funds from the capital market,  which will provide an independent valuation of their worth. Thereafter, the banks may voluntarily opt for acquisition of or merger with other banks. This gradual process will give enough leeway for organisational development. 

Globally, banking majors, in many cases, have evolved through the process of mergers and amalgamations, weaker entities taken over by stronger ones. But all these processes were autonomously driven in order to gain strategic advantages in the financial sector. And that is the way to go about bank mergers.