PSU Bank Mergers Needed But Brace For Short-Term Pain, Former Banking Secretary Says
DK Mittal lists out the challenges that PSU bank mergers may face.
Consolidation of state-run banks will result in “a lot of pain” for India’s banking system in the short term but the process “had to start someday”, according to former Banking Secretary DK Mittal.
The pain will arise from a range of factors – merging technology, rationalising bank branches and manpower, Mittal told BloombergQuint in an interview. “You really can’t time the pain, particularly when the economy is not in a healthy condition in the financial sector,” he added.
The government on Wednesday gave its in-principle nod to merge public sector banks, at a time when state-run banks are saddled with a high level of bad loans.
Mittal said that this decision was long-awaited. “I think it’s a very good thing to start with”, he said, adding that “there are a lot of assets that need to be freed and a lot of wastage, manpower processes and branches will be saved” by the mergers.
Here are edited excerpts from the conversation.
What would be your broad thoughts? It’s an important reform, but if the reform is being driven by the bad loan situation in the banking sector, then I am not sure mergers are the solution. How would you view this development?
I think it is a very long-awaited decision and we must appreciate and compliment the government. At least, they had courage to do it. Many governments in the past have thought about it but did not have the courage to do it. So, this government is moving forward. That’s the political call they have taken and they must have understood it very well. It’s a very welcome sign that they have decided to go ahead.
Short-Term Pain
What is driving this consolidation from the government’s standpoint?
In short term, there will lot of pain in the short term because technology is being merged, internal process have to been synchronised, manpower has to be rationalised, branching has to be rationalised. So, there will be lot of pain. But this pain has to start someday. You really can’t time the pain, particularly when the economy is not in a healthy condition in the financial sector. I think it’s a very good thing to start with. Government will have to put in money. But there are a lot of assets that needs to be freed and lot of wastage, manpower processes, and branches will be saved by having convergence between banks.
But it is a long-arduous journey. It can’t be done quickly. It will take quite some time before the merger can start giving good results.
Problem Areas
Can you flag off some issues that will certainly come up? According to you what is the toughest issue to deal with?
There are two external issues which are very important. One is political and second is the staff unions. For example, if you will take 2-3 banks located in a state and you merge it with some other bank which are located outside that state, there’s a political issue there. So, these issues have to be addressed. This will lead to some optimal solution but that is what the dynamics of politics is.
The second part is the manpower rationalisation issue. Unfortunately, or fortunately there will be huge retirements happening up to 2022-2023 in public sector banks. And these human resource issues can be handled in a smooth manner, provided we work in a polite and negotiating way. The problem would be at the top level. The positions that are available above DGM will get severely crunched when 2-3 banks merge. That is an issue to be addressed. But that issue is for next 3-4 years. I think that can be negotiated well.
The other issue will be of technology. The technology platforms are different. That’s a process which is not impossible because banks are used to changing code banking solution. There’s standard operating process for that. They can follow the process and this can be done to bring everything to one platform, whichever is the best among the banks that are merging.
Most important are the two issues. The internal processes – HR, operative processes and administrative processes – are different which needs to be synchronised. The other issue would be the rationalisation of branches. Branches are too many and there are regional rural banks associated with each bank. So, they need to be rationalised properly, in a slow but steady manner, so that it does not create any problem. All that is manageable but it just requires a strong group sitting and looking at each merger very carefully. Talking to each stakeholder, taking them on board and trying to do the best.
Do you think that the share of credit of the public-sector banks could decline even further or is it such that the market position will decline further or not?
There are two parts to it. Recently we had the merger of ING with Kotak. Did we find a drop in the lending share? No. I do not think the merger will have a problem if it is handed properly. It can really excite everybody to do better. The second part is, yes, the energy of the top management will be heavily invested into it. The merger is tough, time-consuming and painful process. I am confident that the government must have thought about it. They will have to give longer tenure to CMDs of the acquiring bank, and also, even of the bank getting acquired, because there needs to be continuity in them. Also, longer terms in the second and third tier so that this continuity helps them carry the baggage of information which would available with these gentlemen and ladies, and they bring it forward and have the merger done. Once it is planned that way I don’t think there’s any problem in terms of lending. Because lending is done primarily at the bottom level. In very few case it needs approval of the board. So, lot of it is done in the zonal level and below. The lending should not be affected. I don’t think the merger should be a reason for that. We rationalise lot of Regional Rural Banks (RRB) and we merge them together. I don’t think lending of RRBs was reduced. RRBs are very small. But the fact remains that the same process is followed in those cases.