PSU Bank Mergers – The potential and the risks

The big news in the financial markets not so recently was the merger of PSU banks.

Many questions get raised: Are these mergers a big bang reform? What is the rationale behind it? Is the timing right or should we have waited? Will it help boost the economy? and more importantly, for all of us, will it increase jobs in banks?

Let’s analyze dispassionately.

THE MERGER RATIONALE

It has been mentioned that the merged banks will result in few big banks that will make them globally competitive. Well, the merged banks sure look big in India and could, perhaps, even enhance its local competitive edge, but one can’t say the same when it comes to global competitiveness. Because to attain global competitiveness, the banks need to be multi-dimensional, multi-cultural and multi-geographical. They need to be financially strong, have a wide global network, professional work culture, global market expertise, global products, strong brand and state-of-the-art technologies. I am not sure we are there yet. Moreover, the global players are already deeply entrenched in the world markets and it will be extremely difficult for the Indian PSU banks to break into that turf. But that does not mean we shouldn’t try. If the merger does help our banks attain the global edge, then it would be a job well done and truly welcome. 

The mergers are being referred to as big ticket reforms, which will help boost the economy. This is not a reform in the first place, but a Merger and Acquisition (M&A) exercise that is being done to address the Non-performing Assets (NPA) and capital adequacy issues, and lending stress in the banking sector. Moreover,  this is being done at an unprecedented scale involving 10 different banks.

THE POTENTIAL IMPACT OF MERGERS

1. The mega mergers will, invariably, result in ‘Too Big to fail’ kind of institutions raising the systemic risks significantly. That’s a mega concern. At a time when things are dynamic and the pace of change is fast & furious, what is required are leaner, fitter and nimbler institutions that can respond to change very quickly. Hope this aspect has been well thought through and there is a roadmap and workable plan put in place to take care of exigencies.
2. Another major concern is that the bandwidth and focus of banks’ management will be squarely on the merger, and that could take the attention away from BAU priorities, lending, bad loans and recovery process. If lending takes a backseat, it will fail to kick start the economy as one expects. However, in the long run and if executed well, the mergers may have a positive impact on the economy.
3. During the merger consolidation, there is a possibility that customer service could get hit and become a casualty. If this happens, the banks will end up losing big clients to competition and that would trigger another vicious cycle leading to further stress.
4. The current economic slowdown is more consumption led and there are global headwinds and protectionism factors too. Merging of banks will have little impact on the economy in the short term.
5. In any merger exercise, cost imperatives are one of the key drivers, and cost reduction an expected outcome. The bank mergers would result in rationalization of branches, process consolidation, roles and functions getting collapsed, shared resources and common technology platforms. All these measures would lead to overcapacity and excess staff. This could impact the IBPS recruitment process in short term. New job openings, if at all, will depend on whether the merged banks bring out a VRS offer, how attractive the terms are and how many employees end up taking the offer. A hiring freeze will force the PSU bank job aspirants to look for opportunities in private sector banks. The job market is going to get even more crowded and competitive. 
6. One of the key objectives of this initiative is to merge the weaker banks with the stronger banks. We are not yet sure whether this is a good strategy since there has been no precedence. On a pessimistic note, there is a good chance that the combined entity becomes weaker with the merger. On an optimistic note, they come out stronger.

TIMING

Could we have waited?
I would imagine so because the pressing need of the hour right now is to get the banks to start lending again and get the economy moving. And that may not happen any time soon since the management focus will be on making the merger a success. They will, invariably, get sucked into the nitty-gritties of merger like technology, process, human resources and work culture integration, protesting unions and others.

Ideally, we should have studied the existing pilot mergers of State Banks and Bank of Baroda-Vijaya-Dena Bank mergers before embarking on the current initiative - How are they performing? What were the challenges faced? What are the learnings? Did they achieve the merger objectives? Can we call it a success? If the pilot project is not a success, then we would only end up transferring failure to other entities and on a much bigger scale. Also, an important thing to remember here is that once the merger plans are put into motion, there can be no rollbacks. Demergers will no longer be an option if the mergers were to fail.

MAKING MERGERS WORK

Finally, mergers are not just about integrating two or three banks into one. For PSU bank mergers to succeed, we need a mindset and cultural shift, with full functional autonomy, professional management, customer orientation, responsible finance and high corporate governance standards. The mergers, in the end, ought to create value for all stakeholders. Let’s hope it does. Wish them all success!