c





   
 


There must be a process of all round consultation involving all stakeholders before any scheme of bank mergers is taken up.

After a period of relative quiet, the subject of consolidation in the Indian banking industry is back in focus. While no poli cy
statements have come from either the government or the Reserve Bank of India, reports of a meeting that the chairmen of the
five top public sector banks had with officials of the Finance Ministry have evoked renewed interest in the subject.

The heads of Punjab National Bank, Canara Bank, Bank of Baroda, Bank of India and Union Bank of India were reportedly
asked for their views on consolidation so that a road map could be prepared.

No discussion paper, leave alone a major policy announcement on bank mergers, is round the corner. In fact one of the
participating bank chairmen ² K. R. Kamath of Punjab National Bank ² said a few days later that consolidation of public sector
banks through mergers would be a long-drawn out affair and that it was vital to convince all the stakeholders before finalising
a merger.

°
   
 

These are well considered views and are in conformity with what Finance Minister Pranab Mukherjee said in June. PSBs should
look at consolidation as a serious option but the initiatives should come from the banks themselves. In other words, the
Finance Ministry will not drive the mergers but will play a supportive role if proposals do emanate from banks. The latest policy
stance is in sharp contrast to the one that prevailed earlier, when the government wanted mergers to take place within a fixe d
timeframe.

Consolidation has been on the policy agenda ever since the Narasimham II Committee¶s report on financial sector reform
(1997) recommended the creation of four or five large banks in place of the 27 PSBs. Enhanced capital adequacy was touted
as one of the benefits. However, if the government is to retain a t least 51 per cent of the equity capital in any PSB, identifying
a merger partner becomes extremely difficult.

This is because barring two, all the PSBs are listed on the stock market with varying degrees of non -government shareholding.

In any case, to think that a merger between two PSBs can be brought about quickly is a pipe dream.

 

 

The following factors suggest that any such merger will be neither voluntary nor free from glitches.

One is the ownership structure of the PSBs all of which have the government as the majority shareholder. Despite the Finance
Minister¶s assertion that mergers will not be dictated, boards of individual banks and their chairmen will be only too eager to
please the powers that be. Such attitude is extremely difficult to shake off if past experience is any guide.

PSBs never had the autonomy to decide on such major policy matters. In fact a few big banks have declared their intention to
merge with some other banks. Such ³testing the waters´ is only for the p urpose of being seen to be extremely accommodative
of the government¶s intentions. A few years ago wide publicity was given to a possible merger between Bank of India and
Union Bank. This time it is Canara Bank seeking a fit with Dena Bank.

Two, the government being the majority shareholder does not mean that it can ignore the interests of minority shareholders.
Guidelines of the Securities and Exchange Board of India and stock exchanges will have to follow.


 
 


Three, it is difficult to see synergies accruing from such mergers.

For instance, seeking a geographical or cultural fit between two banks is only theoretically possible. All government-owned
banks have acquired an all India character even though in their private sector days they have regional in character. A merger
will entail duplication of branch network especially in towns and metros.

Synergy in technology application will be equally elusive given that the banks are in different stages of technology absorption
and use different platforms.

A more difficult task is to achieve a cultural fit post -merger. Though all of them are government -owned, each has certain
unique cultural strengths that cannot be retained after the merger. In their pre -nationalisation days, some of the banks had
affinities with specific business activities and groups. These have continued under government ownership. For instance, Bank
of India and Bank of Baroda have had a strong stock market tradition, which has flourished well into their public sector days.

There is a real possibility that such strengths will be dissipated after merger with a bank with little exposure to the stock
markets.

ÿ 

Four, a successful merger implies a reasonably smooth integration of staff and human resources related systems.

This will be, by far, the biggest challenge. By their very nature, bank or financial service entities are people -centric. It is not
clear whether those who advocate mergers as an easy option are aware of the strengths of s uch human capital.

There are many other reasons why a merger between PSBs will neither be easy nor beneficial.

Some of the world¶s biggest banks, the Citigroup notably, which relied heavily on mergers and acquisitions to grow
phenomenally, have been rapped on the knuckles by the regulators and are realising that such stupendous inorganic growth
has come at a price.

Again in the U.S. the intense pace of bank consolidation that followed the federal inter-state banking legislation in 1994 has
not been beneficial for small businesses, which are the major job creators.

According to a study conducted on behalf of the U.S. Small Business Administration Office and Advocacy, their access to credi t
has been sharply curtailed.