The first stage in the government?s drive to enable consolidation among PSU banks is now complete. According to a report in The Indian Express on Tuesday, finance ministry-appointed consultants, McKinsey and Ernst & Young, have submitted a white paper suggesting various potential consolidation options to the government. The final recommendations account for factors like market share, profitability, cultural synergies and geographical presence. In each of the permutations, the merged entity will command a 7-8% market share. At the moment, only State Bank of India has a market share greater than 8%?it has a massive 30%. Punjab National Bank ranks a distant second with 5.2% market share. To create stronger, globally competitive banks, there is certainly a case to promote consolidation, particularly among the second and third rung PSU banks?SBI for the moment occupies the top rung on its own. The smaller PSU banks will certainly gain from economies of scale and scope?apart from running more efficient operations, they will also find it easier to raise capital.
But the white paper is not the final word on the subject. In a second stage of the government?s exercise, to be completed by March, a number of PSU banks will present their own plans for consolidation. A combination of the white paper and individual bank proposals will be used to arrive at a final decision, a decision that will have to be sanctioned by the finance ministry and RBI. It is our view that while consolidation may make sense, rather than the government forcing it on banks, more freedom should be given to banks to take their own decisions. That may also work in the government?s favour. Consolidation exercises come with their problems?will there be retrenchment of staff once the merger happens? There will be problems of duplication in staff and infrastructure, so some rationalisation will have to take place. Given the propensity of bank staff to initiate collective action (read strike), will the government have the political will to force the necessary changes? By devolving the final decision to bank boards, the government will be able to avoid the tricky task of taking the final call on all these matters that are bound to surface. Also, instead of involving itself in the details of consolidation, the government should focus on the larger objective of building a strong, competitive banking system. This will not happen simply by merging some PSU banks. The merged entities, if they are to be responsive to customers, need to be exposed to greater competition from domestic private banks and foreign banks. Any consolidation exercise in PSU banks must therefore be accompanied by further liberalisation of norms for private sector (domestic and foreign) competitors.Otherwise, we may end up simply reducing competition and increasing inefficiency.
