How will Consolidating PSBs be Helpful?

The Central Government has directed the Reserve Bank of India (RBI) to initiate the process of mergers and consolidation of public sector banks (PSBs) so that they emerge stronger and sustainable, increase their lending ability, become more profitable, achieve economies of scale and can match global standards.

The consolidation decision appears timely as the banking sector, and especially the PSBs, are reeling under high non-performing assets (NPAs) in their books. Furthermore, this seems to be the best move to boost performance and service delivery of PSBs as well as towards reviving credit and overall economic growth while protecting the financial system and the depositors’ money.

The boards of the three banks – Bank of Baroda, Vijaya Bank and Dena Bank, will soon meet to discuss and finalise the merger agenda and to work out the intricacies involved. Out of these three banks, the last one is the weakest link given its high percentage of NPAs. The policy decision of merging one weak bank with two relatively stronger banks is seen as a safe bet as it will not burden a single PSB with a straddled loan book of the weak bank.

While Bank of Baroda and Dena Bank are formidable forces in the western region of our country, Vijaya Bank’s stronghold is in Dakshin Bharat. The merged entity will not only emerge as Bharat’s third largest commercial bank by assets, but it will also have the vast geography of operations and a unified approach with a streamlined process. It will help in weeding out inefficiencies and delivering enhanced customer experience.

Reforms in the banking sector directed towards improving the financial health of banks through consolidation and mergers have been long overdue, but it was only after the BJP-led NDA Government came to power that tough decisions have been contemplated. As UPA-1 and UPA-2 were coalition Governments, convincing all its allies was not an easy proposition. With the BJP sweeping the 2014 elections and having the strength of numbers, the idea of consolidation also gained momentum.

While on the one hand, the Central Government’s majority stake in the distressed IDBI Bank will now be divested with public sector insurer Life Insurance Corporation (LIC) becoming the majority shareholder, on the other, the three PSBs above will merge to bring in the much-needed efficiencies of scale. The merger is all set to weed out the issue of weak financials of individual banks that have adversely affected their lending activities and credit flow in the market while also reducing the need for an infusion of additional capital by the Union Government.

Now that we have understood the merits of the impending plan let us here discuss the pain points that need to be addressed. Consolidation brings with it sweeping changes in the overall functioning of the merging entities. It not only involves the unification of the financial assets and liabilities but also of the human resources. High NPAs of public sector banks also bring to the fore the concern of the lackadaisical attitude of the staffers. Employee unions and officer associations resist change, and unification will be seen as the most radical change.

From the viewpoint of human resource management, moving employees from their current employer to another entity that has a different set of rules, tends to create a new set of problems. Changes in the top management and modifications at various levels concerning appraisal norms, promotion rules, pension benefits and other perks can certainly upset bank staffers who are used to minimal accountability and relaxed work culture.

Furthermore, the idea of merging a weak bank with two relatively stronger banks is also not infallible. The high NPA ratio of 11per cent of Dena Bank as compared to 5per cent and 4per cent of Bank of Baroda and Vijaya Bank respectively can severely dent market standing and financial health of the latter two entities. Add to this the unrelenting stance of the Reserve Bank that wants all lenders to be as transparent as possible concerning stressed loans. Meanwhile, the RBI rejecting the re-appointment of the Yes Bank MD & CEO Rana Kapoor beyond January 2019 suggests what the future holds.

In May this year, the Central Bank had put Dena Bank under the Prompt Corrective Action (PCA) framework and barred it from opening new branches and extending fresh credit. Although the lending and branch expansion restrictions may end with the formation of the merged entity, the weak balance sheet of Dena Bank will have some adverse impact on the financials of the amalgamated bank.

The consolidation of PSBs isn’t the best way out as far as correcting the anomalies of the public sector banking landscape is concerned. However, it is indeed a laudable remedy to ensure that banks don’t go bust and also to forestall huge losses resulting from the failure of a PSB. Generally, business enterprises with failed financials go for liquidation, but in case of public sector banks, this cannot be a viable solution as it will erode the faith of depositors and will have serious economic repercussions later on. Another way out that seems both reasonable and practical is to divest Government’s stake and privatises some of the PSBs.

With greater accountability comes higher efficiency. When bad decisions of staffers hurt their growth and interests as witnessed in the private sector environment, only then will they understand the value of due diligence and productivity. It is a known fact that PSBs account for higher NPAs as compared to their private sector peers. Shockingly, the PNB-Nirav Modi fraud case has revealed how officials of PSBs collude with industrialists to defraud the very institution they are working for. Although the merging of the three PSBs will give birth to a stronger and better-placed entity, it will still be another PSB.

However, setting aside the reservations above, the proposed merger of Bank of Baroda, Vijaya Bank and Dena Bank must be seen as a very positive development. It sends out a clear message that the policymakers do not fear the risks involved with the integration of branches and processes that are being followed by individual banks, or the merging of work cultures or HR systems, or the threats of employee unions to halt operations.

Unless our decision-makers are ready to take short-term pains to rid the banking sector of seemingly monstrous evils of bad governance as well as the troubled assets and collusion of bank staffers in scams, the conditions in the banking sector will only worsen in the coming years.