Bank Mergers: A flawed move to boost growth?

Sitharaman's decision to merge 10 banks into four may be riddled with leadership
and decision-making challenges

Finance minister Nirmala Sitharaman’s mega bank-merger plan, if successful, will

see 10 government-owned banks being merged into four. Only 13 such banks will now
exist instead of 27.

In the new move, Oriental Bank and United Bank is to merge with the Punjab National
Bank, Canara Bank with Syndicate Bank, Union Bank of India and Andhra Bank with
Corporation Bank, and Indian Bank with Allahabad Bank. The belief is simple: Big
banks can lend effectively, mobilise deposits efficiently and meet priority sector
lending norms better.

But experts say Sitharaman has only announced what P Chidambaram sought to do
through his push for a bank consolidation in 2011-12, when he was finance minister.

“The government only appears to be showing that it is doing something. This reform
is no different from what Chidambaram had proposed. It's just that it's being done
on a massive scale. This government announces these measures with grand plans which
tend to wreck the economy—whether it be demonetisation, GST or these reforms,” says
Hemindra Hazari, an independent banking analyst.

In the second term, the Narendra Modi-led government has severe economic headaches
to deal with: The economy has slowed to a six-year-low of 5 percent for Q1FY20,
employment is still not being created and consumption has dropped off. The merger
is Sitharaman’s way of pushing for big reforms.

But the mergers will be tricky and are unlikely to aid growth. “The consolidation
would limit downside to stressed public-sector bank (PSB) balance sheets and not
lead to any meaningful upside for credit growth in the near term,” says Avneesh
Sukhija, senior analyst (financial services and real estate) at BNP Paribas in
India. “Small PSBs with diminishing brand value will now be subsumed in the merged
entity and hence won’t require a bailout from the RBI or the government.”

ICRA’s vice president and financial sector head Anil Gupta says, “In the near term,
the integration issues such as realignment of organisation structure, redeployment
of staff members across various branches and verticals among the merging banks may
occupy the management bandwidth. This may impact decision-making and credit flow.”

BNP’s Sukhija believes that the merger is neutral for two anchor banks—PNB and
Union Bank, stronger for Canara Bank and weaker for Indian Bank. ICRA’s Gupta also
sees an integration challenge for Indian Bank with Allahabad Bank due to
differences in its geographies and work culture. A similar challenge will be faced
by Union Bank too.

Technology was at the forefront of the merger plan and banks with common platform
are to be merged. Fair point. Despite this, each bank has different internal
banking processes that need to be realigned. This was a sticky issue with the State
Bank of India (SBI)-associate banks’ merger.

What got the government so confident that mega-bank mergers can work? In recent
years, India has seen three bank mergers with varying success; ING Vysya with Kotak
Mahindra in 2015; SBI’s five associates and Bharatiya Mahila Bank with parent SBI
in 2016-17 and Vijaya Bank and Dena Bank with Bank of Baroda.

The Kotak-ING merger worked well. SBI’s merger had hiccups which finally saw post-
merger staff strength at 278,872, after around 3,600 people took VRS. So, in these
new mergers, while Sitharaman has promised that there will be no retrenchments,
administrative branches will be rationalised and VRSs offered. The biggest
challenge for the mergers could stem from this as well as creating a leadership
structure.

Says Hazari: “On an excel sheet or from an accounting purpose, mega-mergers seem to
be neat and tidy, but in practice they are messy.”