Don’t Merge Public Sector Banks

Unless public sector banks are given the same freedom and flexibility as private banks, or they are privatised, merging the state-owned banks is akin to pushing them to disaster.

Recently there have been some murmurs in some quarters that public sector banks should be merged for reasons that include, among other things, improved efficiency, greater banking coverage, increased competitiveness and greater muscle to compete with private banks.

The reasons behind such suggestions, however well-intentioned, are fundamentally flawed. For one, the field of play is not at the same level for private and public sector banks. Without such an equality established, the idea of public sector banks competing with private banks cannot be termed as fair.

First, public sector banks come from an era when Internet banking, phone banking, and even ATMs had not yet arrived. These banks invested heavily in real estate and established physical branches at different cities, sometimes at multiple locations within the same city. Each of these branches had to be staffed with people.

When the age of Internet and mobile phones arrived, public sector banks had to add-on to their branch-heavy infrastructure with an equally heavy IT infrastructure. The cost of maintaining physical branches, staff and IT infrastructure not only adds to high operational costs of public sector banks, but also leads to redundancy of resources.

Compare this to the private banks in India who have a substantially lower branch density, which they augment with a large ATM network within the city to provide basic banking facilities to consumers. Additionally, phone banking, mobile banking and Internet banking reduces the customer’s need to visit branches often. This gives private banks flexibility to ration the number of branches and staff, and save on costs of real-estate and wages.

Second, public sector banks are heavily regulated by government. They are mandated by the state to open branches in rural and semi-urban areas where private banks rarely have a presence. Many of these remote branches are practically running under losses since the business generated by these branches is not enough even to cover the cost of operating the branches.

Therefore, it could technically be argued that public sector banks could also fashion an optimal channel strategy using branches, ATMs, phone, mobile, and Internet banking to rationalise costs. This is easier said than done.

Third, with strong employee unions present in public sector banks, it is nearly impossible to lay people off in case the banks decide to shut down some of its loss-making branches. Having a large number of redundant staff will not only lead to massive inefficiency in operations, but will also lead to a lot of negativity among the employees, thereby adversely affecting the banks’ performance.

This is also the reason why public sector banks have not been able to utilise outsourcing options, as it entails laying off redundant staff, which the employee unions will fiercely oppose.

Finally, nearly every public sector bank has a branch in the most important commercial areas of any city. These branches are, without doubt, responsible for a significant share of the banks’ business and profits. If two public sector banks are merged, it is not clear what would happen to their respective branches in a given area. Whether some branches will be shut down (unlikely) or whether all branches be retained (very likely) is not clear either.

An important and tough issue will be identifying whom to retrench and whom to retain. There will be many such insurmountable issues.

Unless public sector banks are given the same freedom and flexibility as private banks (or, are privatised), the idea of merging public sector banks is akin to pushing them down the path of disaster. This is a sure shot way to decimate them.

A more reasonable solution may be seamless integration of banking between different public sector banks so that customers are able to access banking services for their respective accounts via any PSU bank irrespective of the bank they opened their accounts in. This might also open opportunities for public sector banks to share a common ATM network, common Internet banking and phone banking platforms.

Unless the government wants to deliberately bleed public sector banks to the point where they can be put up for sale to private players at throwaway prices, the strategy of merging public sector banks is inexcusably ill-thought.