Just because Maidavolu Narasimham believed in minimalism and the Narendra Modi government walked the talk, banks mergers announced by Finance Minister Nirmala Sitharaman may not be a roaring success. The legendary Narasimham Committee, through two of its detailed reports, set the stage for reforms in banking sector. Old-timers would agree that Narasimham was to the banking sector what Raja Chellaiah was for taxation reforms. These two worthy Southies must share between themselves the laurels for bringing about momentous changes to banking and taxation that were otherwise moribund structures reeking of British-era vestiges. All expert groups constituted since have only built on the basic edifice built by Narasimham Committee in 1991.
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Like many State-run banks that are at least a century old, with UN-approved heritage buildings, reforms in the sector have come a long way from the days of moving RBI headquarters out of Kolkata in 1937. A lot of water has flown down the Ganga since then and the banking sector has changed beyond recognition. The first big set of reforms hit the banking sector when 14 privately run banks were nationalized in 1969, followed by six more in 1980.
The latest decision to merge 10 large PSBs into four is easily regarded as a big move. But then, will mergers alone enhance value for customers -- both depositors and borrowers? If the mega bank mergers were timed by the Modi government to divert the attention of the people from the menacingly low GDP growth at 5% during April-June 2019, the lowest in 25 quarters, then the mergers could be farcical. As many bankers have argued, bank mergers need not have been used as smokescreen to underplay the economic misery unfolding.
Now that the mergers have been announced, the actual process has to begin. The government will have to take lessons from the amalgamation of SBI and its subsidiaries. Vijaya bank and Dena bank subsuming into Bank of Baroda last year would also have provided insights into the intricacies of the process, which may spread over two to three years. Similarly, Kotak Mahindra Bank’s acquisition and assimilation of the ING Bank, which most South Indians knew in its earlier avatar as Vysya Bank, was yet another messy affair that took more than two years to achieve.
Like many corporate mergers and acquisitions, the key will be to bring about harmonization in work culture and human resource compatibility, recognizing the competing joust for key positions, ranks, pay structures, etc. For instance, Punjab National Bank’s top bosses may have to be magnanimous with their colleagues from Oriental Bank of Commerce and United Bank. Similarly, the Canara bank leadership may have to display dexterity in absorbing Syndicate Bank personnel seamlessly. Needless to say, chaos will be the norm during the first few months unless the leadership steps in quickly to douse fires instantly. Given the assurance that no employee would be sacked, the task gets all the more trickier in redeployment and productive use of the personnel by the anchoring bank. If branches and personnel are not to be rationalized, as the government has been saying, then will the mergers actually save any costs at all?
Notwithstanding the messiness in processes and technology platforms integration, the larger banks and their boards would command bigger clout amongst the business circles. For instance, the SBI chairman’s confidence level to deal with key businesses and government babus after the amalgamation has gone up many fold. Negotiating larger deals, avoiding duplication, overlapping and closing business transactions quickly would be some benefits. There’s potential to save on huge administrative costs, technology platforms, avoid duplication in branches, share infrastructure, negotiate better terms with services providers, and all these could benefit customers.
Building resilience in larger banking entities to withstand business failure shocks would perhaps be the biggest challenge for which the RBI, the finance ministry and banks themselves have to gear up. The collapse of one big bank could have dire consequences for the market, perhaps even our own Lehman Brothers moment. The collapse of the systemically important IL&FS, a shadow bank with a debt portfolio of Rs 1.04 lakh crore, is singularly responsible for the liquidity crunch that has singed the market in the last year.
Uncompromising integrity and sense of purpose will have to be displayed by bankers, who must take charge of their business, enjoy the freedom with responsibility and accountability and run their empires with zeal. Inducting talent from the private sector to manage large banks has happened in a couple of cases recently. In 2015, former Citibank hand P S Jayakumar and former Microsoft India head Ravi Venkatesan were co-opted to lead Bank of Baroda as managing director and chairman respectively. Similarly, Rakesh Sharma was scooped from Lakshmi Vilas Bank to head Canara Bank. This trickle of good talent will have to become a big pool of top managers, CEOs and personnel at every level. Reverse movement of top banking specialists should also become a mandate of the banking recruitments bureau to enable these large PSU banks to close complex deals and operations.
While governance at large banks becomes a decisive factor for growth and success, they must also set aside resources for research and development of new products and services and to compete with private and foreign banks on every parameter. In India, banks have never been known for hiring intelligence specialists and psychologists to deal with behavioural patterns of big clients to ensure that risks related to lending could be dealt with effectively. A beginning may have to be made in this regard now. Mere infusion of Rs 70,000 crore capital into banks may not solve the gigantic non-performing assets piled up in banks. A roadmap for, say, five years needs to be readied if bank mergers must yield results. Decoupling the mergers with the economic revival conundrum would work well as a strategy for both Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das. Once these four large banks consolidate, the government should roll out its next reform measure -- slashing its holding in them to 33%.
(The writer is a Delhi-based senior journalist and economic analyst)