Consolidation blues

Forced bank mergers can be tricky

On Monday, the central government announced that it wanted to amalgamate three public sector banks (PSBs) — Bank of Baroda, Vijaya Bank and Dena Bank — to create a new entity, which would be the third largest lender in India. The boards of the banks are expected to meet over the next fortnight to take a call on the all-stock deal, but that seems a mere formality now. The move is the latest in line with the government’s thinking that PSBs need consolidation. It merged five associate banks into the State Bank of India last year and followed it up with the Life Insurance Corporation’s proposed takeover of IDBI Bank. The key motivation behind this consolidation process has been the growing non-performing assets (NPAs) in the banking system. This is a crucial factor while evaluating whether such mergers and amalgamations are the best way forward. Indeed, as this paper has argued several times in the past, forced consolidation of this sort is a tricky affair and the track record of such mergers has remained weak.

The forced mergers of New Bank of India with Punjab National Bank and that of Global Trust Bank with Oriental Bank of Commerce show that they help neither the acquirer, not the acquired. The SBI merger is yet another example. The urge to consolidate PSBs is nothing new. A panel led by the former governor of the Reserve Bank of India, M Narasimham, had, in 1998, argued for a three-tier structure for Indian banks. But in a market-driven economy, one cannot approach banking structures dogmatically; instead, the policymakers have to allow for market demands to determine the shape and size of banks. The Reserve Bank of India has put in place a far more liberal scheme with on-tap bank licensing. In such a scenario, creating entities by government diktat does not make sense.

The government has claimed that the merger will improve the operational synergy of the three banks and is part of a plan to create larger Indian banks instead of smaller entities vying for the same business. Besides, the merged entity, the government says, is positioned for a substantial rise in customer base, market reach, operational efficiency, and a wider bouquet of products and services for customers. But the reality may not be so. The gross NPA ratio of Dena Bank is among the highest at 22 per cent, while Vijaya Bank has a gross NPA ratio of 6.9 per cent and Bank of Baroda 12.4 per cent. The merged entity will have NPAs of about 13 per cent, worse than Bank of Baroda’s present 12.4 per cent. What is the message the government is sending to BoB’s shareholders? Such mergers also do not address the reason why India is facing the current banking mess. The fact is, and the 2014 report by the P J Nayak committee makes it amply clear, PSB boards suffer from appalling governance standards. Merely merging the laggards with those which are comparatively better off might be good optics for a government on the move, but it does nothing to change matters on the ground. A diktat on merger, which dents the credibility of the boards of the banks, speaks poorly of a government which promised to “stop the phone calls from Delhi” when it came to power.