India’s Bank Merger Plan Will Eliminate Duplication, Lower Costs: Former SBI Chairman

India’s move to merge public sector banks is a step in the right direction but only time will tell how beneficial it is, according to Pratip Chaudhuri, former chairman of State Bank of India.

“How the integration happens will determine how successful the bank merger is,” he told BloombergQuint during an interaction.

On Friday, the Narendra Modi-led government announced its plan to merge 10 public sector banks into four, lowering the total number of state-run lenders to 12 from 21, as it aims to better manage capital. According to the government’s plan, Punjab National Bank will take over Oriental Bank of Commerce and United Bank; Canara Bank will take over Syndicate Bank; Union Bank of India will take over Andhra Bank and Corporation Bank; and Indian Bank will be merged with Allahabad Bank.

The government, Chaudhuri said, has chosen banks based on similar digital platforms, which will eliminate duplication, lower the time spent on training the workforce and rationalise the structure to make it more compact. This will also lead to minimum disruption in service to the customers, he said.

About the timing of the bank merger announcement, Chaudhuri said it’s better this time as all credit-related issues are more demand-driven rather than supply-related. Due to this demand slowdown, he said, banks are not bogged down by the competitive pressure for credit expansion and they can have a focused approach towards a seamless integration.

Also, the government’s plan to merge PSU banks will lead to significant cost savings, according to Chaudhuri. Employee costs is not the only savings from a merger, he said, adding that “another big cost is the real estate cost and once you collapse these banks into one, the need for real estate and the requirement of space goes down. That’s a significant saving.”

In line with the government’s intention to not lower its holding in the state-run lenders to below 51 percent, Chaudhuri said, “The only reason why these banks are able to increase their customer base is because they are Government of India undertakings. If the government would bring down its holding, the attractiveness of these banks to depositors would fall. And if the holding goes below 51 percent, I do not rule out a flight of deposits.”

Other Highlights From The Conversation:

• Banks reflect the state of the economy.
• NPA pile-up is inevitable if the corporate, manufacturing and trading sectors are facing a slowdown.
• Private sector banks have been plagued by similar issues and are no different from PSU banks in this context.
• There is a distinct possibility that the next NPA cycle could be triggered by the retail and MSME sectors.
• If corporates are facing challenges, then it is difficult to believe that issues are not there at the retail level. It is just a matter of time when issues will travel down the line.

Watch the full interview here: