Four Big Bang Bank Mergers: But Modi Government Is Still Wary Of ‘P’ Word - Privatisation 

And then there were 12. On Friday, Finance Minister Nirmala Sitharaman set off the third round of public sector bank consolidation which will, when operationalised, reduce the total number of banks in the state sector to 12 from the current 18. An idea mooted as far back as 1991 is now finding its logical culmination.

What is missing is the P word – privatisation. For now, it is the C word – consolidation – that is being pushed through policy. It may help in the short run, but in the long term there is no guarantee the public sector banking will manage to keep its head above water at all time.

Four major mergers were announced: cluster one will be headed by Punjab National Bank, with Oriental Bank of Commerce and United Bank of India being merged in it. To give it scope for credit growth, this cluster will get additional capital of Rs 17,000 crore. After the merger, this will be the country’s second largest bank after State Bank of India. The merged entity will have a strong presence in northern and eastern India, and will have net non-performing assets (NPAs) of 6.61 per cent after the merger.

The next cluster will involve two southern banks, with Canara Bank swallowing Syndicate Bank. It will become No 4 in the national pecking order. The cluster will get Rs 6,500 crore in extra capital and after merger will have net NPAs of 5.62 per cent.

The third cluster will have Union Bank at the helm, with Andhra Bank and Corporation Bank being merged with it. The bank, which will have a strong western and southern footprint, will get an additional dollop of Rs 11,700 crore in extra capital. Net NPAs after merger be 6.3 per cent.

The last cluster involves a north-south combo, with strong Indian Bank taking over Allahabad Bank. It will get Rs 2,500 crore in new capital since its merged net NPAs will be a low 4.39 per cent. In terms of cultural challenges, this merger may be the toughest to pull off.

After these mergers are operationalised, six nationalised banks will remain separate - Bank of India, Central Bank of India, Indian Overseas Bank, Uco Bank, Punjab and Sind Bank and Bank of Maharashtra. The first two have a national footprint, but the remaining four have largely regional franchises. Quite clearly, one cannot presume that these banks will remain standalone forever. At some opportune moment, more mergers cannot be ruled out.

It is interesting that merger and consolidation of public sector banks was first mooted in 1991-92 by the M Narasimham Committee, which suggested that India should have three or four banks with international scale, eight to 10 with a national footprint, and the rest having regional heft.

Sitharaman’s announcement is actually a realisation of that report, and is indicative of poor political support for the process in the intervening years by various governments. It has taken a government headed by Narendra Modi to make that report a reality – after a delay of 28 years.

The UPA, despite ruling for 10 years, did not manage even one big merger while the NDA under Modi has already managed two (SBI and Bank of Baroda-Vijaya-Dena Bank), and four more are in the works. These mergers, assuming there are no hiccups, will probably be effected by the start of fiscal 2020. The BoB merger with Vijaya Bank and Dena was announced in September 2018 and completed within six months. The remaining mergers announced on Friday will probably follow the same timeline.

Since the mergers have been well thought out with the idea of technological compatibility and geographical and financial synergies, they should work smoothly. The Finance Minister also announced a series of measures to improve governance and risk management at public sector banks, which means that in future these banks will be more careful about lending to dubious parties.

Among other things, boards are being empowered and risk assessment given pride of place. All banks are being empowered to recruit risk officers at market wages, and not public sector pay. Managing directors may also be recruited from the market, and not restricted to seniority within banks. Senior management at the chief general manager level will be given at least two years of tenure.

But some concerns remain. These include…

#1: There is no plan as of now to privatise any bank. This means the public sector will always remain large. Clearly, the Modi government is still wary of privatisation.

#2: Despite attempts to consolidate banks and improve governance, as long as bankers come under the coverage of the Central Vigilance Commission, they will continue to remain cautious about lending, or decision to write off loans that are unrecoverable.

#3: Very large amounts of capital have been pumped into public sector banks, including the ones being amalgamated now. This year another Rs 70,000 crore is being given to banks, and this does not mean further infusions will not be needed next year. The question is whether such humongous capital infusions will generate enough social returns for the taxpayer – leave alone profits – to justify the costs.

#4: No employee redundancies are being planned in any of the proposed mergers. This means the cost synergies and benefits will come only through natural attritions. But branch and overhead rationalisation can come faster.

Narendra Modi has to ultimately bite the bullet of privatisation. A Prime Minister who can push through a contentious legislation like the abolition of Article 370 can surely muster enough votes to start privatising not only banks, but also other public sector white elephants like Bharat Sanchar Nigam. Air India, of course, is already in the pipeline. It has to be pushed through quickly to give privatisation real momentum.