Public Sector Bank Mergers A Good Beginning, Here’s What To Do Next
In the context of the current slowdown, where India’s GDP growth for the first quarter has come to a six-year low of 5 percent year-on-year, it is very heartening to see that the central government is being proactive with this initiative of merging some banks.
This initiative is a welcome move in the right direction by the central government. One of the causes for the slowdown was the reduction in lending following the financial problems we saw from the IL&FS issues since last September. Consequently, the banks started going slow on lending to NBFCs, which in turn did not have the money to lend for purchases of cars, two-wheelers, houses, etc. That aggravated the slowdown caused by poor and erratic monsoon as well as the lingering effects of demonetisation and Goods and Services Tax. This initiative by the central government is a measure to help improve banks in their capital adequacy.
Using Capital As An Incentive
In addition to the bank mergers, which by itself may enable funds from some of the erstwhile independent banks to be loaned, the government is also infusing capital into some banks.
However, I wish the government would not just give away the capital as equity but give it in the form of a convertible which converts optionally at the instance of government once certain parameters are met, such as the net NPA ratio, profitability, etc.
The managements and boards of directors of the banks that get the capital infusion need a powerful incentive to strive to meet these parameters to get equity capital reasonably fast. It need not be a long-dated conversion but should convey the message that if you perform, then this optionally convertible debenture will become equity capital. This is one idea they should adopt and it should be fine-tuned to suit individual banks and their situation.
Along with this capital infusion and the mergers, the central government is, as the owner, trying to improve the governance of the banks. We have seen in the past how badly run some of these banks were from the newspaper reports on lending decisions being made not on merit but for other considerations.
The improvement in governance is focused on objectives sought to be achieved, systems and processes within the bank itself, merit-based lending and oversight by the board. The government had taken a decision in the past on the separation of the role of the chairman and the managing director—earlier the public sector banks were run by one person who was chairman and managing director, but this separation is not efficiently implemented. It should be implemented immediately by giving some more powers to the chairman so that the chairman has some oversight and responsibility over the board and also over the chief executive officer.
Customer-Focussed Improvements Next
One of the great blessings these public sector banks enjoy is the perception that the government is behind these banks. They, therefore, get continuing inflows into low-cost current accounts and savings accounts from the public. The public sector banks must capitalise on this as long as this lasts. With these banks becoming stronger and bigger with capital infusion and mergers, they have the opportunity to do so. If a small bank like United Bank with very poor performance in the recent past can have a CASA of 51 percent, it shows how public sector banks can pull themselves into profitability by competitive and efficient lending.
To sustain CASA inflows, these banks must consciously embrace technology for improving service standards and their products-offerings, so that they can more easily compete with other private sector banks in sustainably raising low-cost funds.
Till today, many public sector banks do not effectively offer demat accounts or e-banking or phone-banking services for investment in other financial products. As clients progress from investing only in fixed deposits to deploying funds in other financial instruments, which is a big objective of Prime Minister Narendra Modi’s Jan Dhan and demonetisation initiatives, banks must respond by offering all such facilities to the common man. They must work with the Reserve Bank of India to simplify the know-your-customer and recurrent KYC requirements, which should be the means to an end and not an end in themselves. They are needless irritants to the common person, as are requirements to treat as dormant an account under certain conditions—not every person has the ability to have transactions in the account with the frequency expected by the regulators. Such regulatory requirements only increase frustration of the common person.
For technology improvement, public sector banks do not have to re-invent everything. There is a tendency to go for the lowest-cost bidder, not the best vendor. Here is where the owner of the banks, the government, has to wake up and say that we don’t need such processes.
Also, the bank managements must be given the freedom to strike alliances with fintech companies as they are able to provide state-of-the-art technologies. They may make such alliances so that they can offer full service to the customer so that the customer becomes indifferent about whether they are dealing with a private sector or a public sector bank; indeed, they would prefer coming to the public sector bank since these banks are perceived to have the backing of the government.
Simultaneously, in this liberalisation process, the management must be given the freedom to harmonise branches, redeploy staff, accelerate voluntary retirement/ separation schemes. Without such measures the benefit of the bank mergers in terms of cost efficiency will not come through. The intermediation cost must come down with these mergers.
Each bank should feel more responsible for its own lending and not rely on a merchant bank’s appraisal, as they did in the past, or following a leading public sector bank in a herd mentality.
Some elements like voluntary retirement/separation will take away some of the institutional experience and memory that the banks have today. They must accelerate the development of skills with training programmes. The ability to operate in a competitive environment is extremely important and the merger process can help in talent availability.
The mergers proposed are not a solution, they are only the beginning of a process to make these banks play their expected role in the development and growth of the economy. The government seems to have taken considerable care in merger considerations to have as low a geographical overlap as possible, as for instance when Union Bank takes over Corporation Bank and Andhra Bank.
The government also seems to have recognised the IT systems employed by each bank and proposed the merger of banks with similar IT platforms. Yet, a lot has to be done by the government, RBI and also by each individual bank to make the public sector banks part of the commanding heights of the economy.
Pradip Shah is the chairman of IndAsia Fund Advisors, and a member of the Banks Board Bureau. Views are personal.