#BQDebates: Will Consolidation Lead To Better Public Sector Banks?
Does the government’s plan put in place a framework that would work for the state-owned banking system?
The government said on Friday that it would merge 10 public sector banks into four, bringing down the number of public sector banks to 12 from 21. The PSB mergers would help in better management of capital, said Finance Minister Nirmala Sitharaman while announcing the proposal as part of a package of ‘reforms’ for the economy.
According to the plan:
- Punjab National Bank will take over Oriental Bank of Commerce and United Bank of India
- Canara Bank will take over Syndicate Bank
- Union Bank of India will take over Andhra Bank and Corporation Bank
- Indian Bank will be merged with Allahabad Bank
This move is aimed at creating stronger banks on the back of capital infusion by the government into the lenders.
On capital requirements, commercial viability, growth prospects, and future readiness, does this plan put in place a framework that would work for the government-owned banking system?
BloombergQuint spoke to banking experts to understand what they make of these public sector bank mergers.
Government Should Ensure Good Governance
- VG Kannan, Chief Executive, Indian Banks’ Association
It’s a bold decision and one which was expected after the earlier announcement of BoB, Dena Bank and Vijaya Bank, which has been successful. Prior to that, we had the State Bank of India, which was also successful. This is clearly the road map which was designed a few years ago, as to have some few large banks which can take a ‘central stand’ to carry out the normal banking activities, rather than having too many banks in the banking space and doing almost identical work, and causing duplication.
I think it’s a great step, and simultaneously, launching the infusion of capital also will ensure that the increase in NPAs going forward, will be taken care of, and sufficient capital, possibly to do some additional growth, which is absolutely essential at this juncture.
One thing the government should ensure is having good governance, and that is a question of time before things work out. I think since the banks have similar kind of staff, the merger should not be that difficult. There will be rationalisation which will benefit the banks as well as the customers. Overall, it should be a win-win situation.
I am quite hopeful that if there is proper governance and freedom given to the banks, as in the last few years, I think it will augur well for the banks.
The First-Hand Account Of A Recently Merged PSB
- PS Jayakumar, MD and CEO, Bank of Baorda
The combined institutions will be better than the sum of the parts. Once a new and enlarged business purpose is established, there is a superordinate for all employees to rally around. Acceptance for what is best for the breed amongst the various process including human resource practices regardless of which institution the idea came from, is important. The employees of the larger institutions, treating the other as equal is very critical. A meritocracy culture being established and success of any employee not being dependent on which predecessor bank is also important to provide credibility to HR practices. And finally communication, communication and communication on purpose and benefit of the consolidation to all section of employees is important to build ground level support to the consolidation initiative. With the support and guidance of the Department of Financial Services and regulators including capital support derisks consolidation. So I think with these institutions securing free capital, working of lower net NPA , capital, stronger and good management team—I think they should be able to pull it off.
Canara Bank-Syndicate Bank in fact operate in similar markets, gives them an overriding market share in those economies.
As it so happens that the tech platforms are also similar and so is there a common culture. There is a confluence of many favourable factors.
If you were to look at it, one of the things achieved in this set of reforms, is a strong core corporate governance process. The fact that the management of the bank is accountable to the board in very clear terms, it is a very strong factor in good governance, and there is a lot of flexibility provided like compensation of non-executive directors to attract talent and better commitment. So I think this is a significant structural reform, an element of which is the way in which the banks would be run. In it is a couple of things. We need more executive directors (three-four) with somebody to focus around tech and innovation and the role of the Chief Risk Officer is also very important. In Bank of Baroda, we have been taking and hiring people at market-based compensation for very specific roles and so this reform is in continuation of process of providing market-based compensation.
Governance Should Be Separated From The Government
- Abizer Diwanji, Financial Services and Restructuring Leader, EY India
The merger of public banks is a good thing because we clearly need more scaled banks. The positives of the merger are that they have given some consideration to consolidation in terms of synergy. They have also considered geography.
However, the issue is whether all four of them needed to come at the same time, and that I think is a little bit of disruption in the system.
It drives away focus from actual lending in the near term—one to two years. The stronger banks which were expected to be catalysts of lending will slow down a bit to get into the consolidation and integration mode.
Maybe they could have done the consolidation in an isolated manner.
All the changes pertaining the governance seemed very peripheral. For example, including sitting fees of directors. It was more important that there was more empowerment given to the board. For example, why was the CMD of a bank not selected by a board? Why is it fixed by an appointment committee by the government? If that was given solely to the bank to decide or the Bank Bureau Board to decide, then it would have made a difference.
Capacity building is another good part. There are leadership training programs, the Bank Bureau Board will now build a pipeline of executives. The devil of course is in the detail, but these are very good ideas.
I think more was required from detaching government from running banks. That is something that I really expected because that is the big game changer.
When they said, for example, that the credit risk officer can be recruited from outside at market rates. First of all, that is an acknowledgment of the fact that the current bank officers are not paid market rates. They should be.
These things seem less thought of, in my opinion. Governance I think is lacking in that sense.
There should be a power to detach banks and have the empowerment go completely to a bank board bureau. If this would have happened, I would have been happier.
Had appointments been made more independently by shareholders and boards, it would have been good.
The government controlling banks is still a big issue, and whatever we do in terms of bringing about consolidation of banks, governance should be separated from the government.
Mergers A Good Step But Not Sufficient
- Harsh Vardhan, Executive-In-Residence, Centre of Financial Services, SPJIMR, and Member, Committee to Review Governance of Boards of Banks in India.
This is a good move. I have always believed in the consolidation of public sector banking. There are far too many banks and they are very homogeneous. In many ways they used to be like one bank with different names. There is no differentiation other than size. It increased the governance problem of the government. You had to find 27 CEOs, 27 boards, so when you’ve reduced them to a few, at least that problem is contained.
Whether they are synergies or not, to me is a different issue. Even with private sector mergers, you see synergies on paper which are very hard to realise.
I think here the bigger advantage is because all the internal processes are by and large very similar, it makes things simpler.
In any other merger, HR salaries can create many problems. Here all of that is standardised, the levels are standardised, salaries are standardised, so all of those issues will not be there.
The bigger issues would be things like overlapping branches, will the regulator allow them to shut them down? how do they shut them down?
There are a lot of good things but having said that, I don’t think it helps solve the bigger issue that the banks face of NPAs, of just the institutional weakness that has set in, the fact that they have lost competitiveness in most products in the market—those are not going to be addressed.
I will put this as a good and necessary step, but not sufficient. Along with this, if the government can actually take steps to address some of the governance issues, improving internal processes, making access to better talent easier for these banks, freeing them from wage accords which ties all of them to the same wage level, all of these issues are not going to be solved just by a merger.
It has some benefits, but it does not solve all the problems.
The first merger that they did with Bank of Baroda, Dena Bank and Vijaya Bank seems to have gone relatively well, so they might replicate that template.
It’s a good step, but I don’t know whether in the broader scheme of things, it’s an adequate step, meaning it is not going to allow them to regain competitiveness, which they have lost over the last many years.
Government should push consolidation, but along with that try to improve governance. For example, these merged banks try to improve the kind of directors that they have, give more flexibility and autonomy to the talent that they can hire.
The merger is solving an issue for the government. It is not necessarily solving the challenge for the bank, which is how to regain competitiveness.
Consolidation Not A Remedy To The Problems That The Sector Is Facing Today
- Saswata Guha, Director & Team Head, Fitch Ratings
Our view as far as consolidation is concerned has always been that consolidation in the sector is an essential tool to future proof the sector, especially for an economy like India which has ambitions to grow at levels it does.
Consolidation is not a remedy to the problems that the sector is facing today. We are very clear about that. There are issues which still need to be resolved, like stock of NPLs, tardy resolution, and overall weak constrained capitalisation. These issues still remain very pertinent, but to give due merit to the steps taken from a consolidation perspective, we tend to look at it differently.
Consolidation serves a very different purpose. Whether banks are prepared to do that is a very different question. On the whole, I don’t expect consolidation to be negative, if one is really looking at the sector and its performance over the next five to 10 years.
These Mergers Will Benefit The Entire Banking System
- Sunil Mehta, MD & CEO, Punjab National Bank
One thing I can tell you is that this particular merger is going to be beneficial for the entire banking system and the country as a whole. The three bank mergers will bring a lot of synergies in the amalgamated entity, because Oriental Bank of Commerce has got good systems and processes. We have an overlapping geographical presence where we can optimise utilisation of our infrastructure as well as resources, and improve profitability. United Bank of India has a lot of strength, a large CASA base and they have a presence in east and northeast India. So the bank will be able to serve a lot of new customers and existing customers on a pan India basis. This will bring in a lot of convenience for the customers.
All the requirements of the bank, including the minimum regulatory requirement and growth requirement have been computed while working out the capital infusion. This will be really beneficial for economic growth.
Empowering boards of public sector banks will definitely improve their corporate governance and independence in decision making.
I do not foresee any HR issues. It will be a win-win situation because employees of each bank will get the better of the three.
Geographical Consideration Biggest Advantage
- RA Sankara Narayanan, Managing Director, Canara Bank
Both Canara Bank and Syndicate Bank are Karnataka-based and that is the number one advantage. Culturally, there won’t be any difference at all. There are 10,300 branches and 15 lakh crore-plus business mix. It will definitely add value. It will be the fourth largest PSB after the State Bank of India, Punjab National Bank, and Bank of Baroda. Plus, the government is also giving us capital which will also give us better opportunities to do quality business with better consortium arrangements and controls.
The government has applied its wisdom and mind before coming into conclusions not only on size but also on the IT and infrastructure. They want stronger banks across India, and fortunately, Canara bank has its presence across India and not necessarily in the south. In the next seven-10 days time we will definitely be going to the board. It is a simple process. I am sure board will be only too glad to encourage such initiatives. We think that once we get the approvals from the government and the gazette notifications, the actual integrations may happen some time in April 2020 as it had happened in the Bank of Baroda-Dena Bank-Vijaya Bank combination.
The announcement of Rs 6,000 crore capital infusion will be very helpful. We had plans to raise similar capital from market. Now, the government is giving it so that makes our job much easier and we can concentrate on core activity of quality business and integration process.
There will absolutely no HR issues. Most of PSBs have proper governance. We are reiterating here and definitely the points will be well noted, deliberated and implemented in all the bank boards.