The Finance minister Nirmala Sitharaman on 30th August decided the fate of PSBs in India with yet another press conference aimed at treating the ailing Indian economy. There have been many strong economic reforms proposed but the PSBs merger is by far one of the most significant yet controversial one. What, when, why, how; it’s better to understand these aspects of the merger in synergy. Will this move re-energize the falling economy? Are the proposed reforms bold enough?
WHAT’S THE MERGER ABOUT?
The government has decided to carry out a merger of 10 banks into 4 which will reduce the number of PSBs in India from 27 to 12. The FM also proposed a 55,000 crore capital infusion into the PSBs. The move comes as a reform to uplift the degrading economy which recorded nearly a six year-low GDP of 5% for the FY20.
The merger plan goes as follows:
1. Punjab National bank, Oriental Bank of Commerce and United bank to be a single entity. It will be the second largest PSB in India after SBI with an expected business of 18 lakh crore rupees post the merger. PNB will be the anchor bank of the merged entity. The outreach of the PSB is expected to increase with over 11,000 branches across India.
2. Canara bank and Syndicate bank will merge into a single entity with an expected business of over 15 lakh crore rupees. Canara bank will be the anchor, the PSB will have over 10,000 branches.
3. Union bank, Andhra bank and Corporate bank will be a single PSB. This merger is in news because of the cultural diversity it promises. The business is expected to be over 14.6 lakh crore rupees with over 9,000 branches.
4. Indian bank and Allahabad bank will be a combined lending entity. Indian bank is to be the anchor. The expected business post the merger will be 8.08 lakh crore rupees.
WHAT ARE THE GOVERNMENT’S CLAIMS?
1. The government claims that consolidation is the way forward. The FM stated that these mergers are aimed at incorporating the best practices of all individual banks into the merged entity thereby creating a successful global level financial institution.
2. She allayed the fears of any job loss clearly stating not even a single employee will be laid off.
3. Better tech, strong balance sheets, wider branch networks, better service to the customers will ensure enhanced productivity leading to better lending.
WHAT’S IN STORE FOR THE CUSTOMERS?
The FD interest rates are believed to remain unchanged. Changes will begin once the IT and HR integration will be completed which is bound to take 18-24 months. Although the government hasn’t released a clear cut timeline for the mega merger project but the CEOs of the merging banks expect the project to be completed by April 2020.
There may be changes in account numbers, customer IDs and IFSC codes. If you have accounts with more than one merging entity, the two accounts may be allotted a single ID. All in all, people need not be overly alarmed but keeping a check on the Board meetings of the merging entities won’t do any harm.
INDIA’S MERGER HISTORY
India is no new to bank mergers. The very first PSB merger came in September 1993 when New Bank of India merged with the then efficient PNB. This merger did more bad to PNB than good to NBI. PNB had to sustain the massive loss of 450 crore rupees of a financially weakened NBI against 186 crore of capital. History shows that if not thought through, bank mergers can be a real disaster.
Coming to the recent events, even the 2017 SBI merger wasn’t a grand success. Post the merger with Bhartiya Mahila bank, SBI laid off 6,622 employees in Q1FY18 followed by 3,962 in Q2FY18. This came despite the fact that Mr. Arundhati Bhattacharya, the then chairperson of SBI, had assured that no employee would lose jobs. This was a heavy layoff compared to 3,197 employees for the entire fiscal of 2015-16. This just goes to show that even though mega mergers might seem very neat and tidy on excel sheets, they are actually a lot messy in practice.
THE CHALLENGES AHEAD
1. Initially, there will be more focus on management alignment which is bound to impact the loan growth and reduce focus on strengthening asset quality. So, one can expect a lot of trouble in the short run.
2. The financial crisis of 2008 shows us that large financial institutions are simply too big to fail. Small scale losses and high NPAs are still bearable but once the merged entity becomes a large financial entity, things just can’t go wrong. So if the merger really serves its purpose, we will be catering to a serious fiscal risk.
3. For the mega merger to work, an efficient leadership structure has to be laid out. Work culture, geographies are different for these merging banks and this becomes a serious challenge. The merging entities must feel welcomed by the anchors. Compliance is necessary in ever decision.
In a nutshell, it’s all about the execution and given the NDA government’s history with execution including big economic and financial blunders like demonetization as well as GST, NDA 2.0 is running a serious risk with their new merger plan because the Indian economy cannot simply afford another downsizing hit. The one common thread behind the 4 mergers is simple – merging banks operating on similar core banking principles. What we need to ask ourselves, is it the only rationale for the merger or is the decision economically and financially thought through?