With the Congress forming the government largely on its own, discussions on financial sector reform and on public sector bank consolidation have restarted. Many ways forward are being suggested without a structured view on costs and benefits. Let me offer five alternative approaches to merger with some obvious pros and cons with each: 1. Strong with weak, 2. Culture match, 3. Big with Big, 4. North with South, 5. Big with Small.
1. Merging strong banks with weak banks is being talked about as a way to minimise possible demands on the government for bank recapitalisation especially for those banks where government holding is close to the 51% limit. Such an approach can work if the weak bank is very small compared to the strong bank and has been used in the past. The risk, of course, is as Bimal Jalan once remarked ?that merging weak with strong should not end up creating only weak banks in India!?
2. Another approach can be to merge banks with similar cultures. In a culture match the government would pick banks from the same region and merge them. Such mergers offer large cost synergies due to branch overlaps. However in the public sector this can be seen as a negative because employee rationalisation is difficult. To pull such mergers off requires intelligent relocation and reconfiguration of branches to deal with the overlaps. Otherwise they lead to inefficiencies in the merged entities even with similar cultures.
3. A third approach could be to try and create national champions by merging two large banks. Such a merger will create the possibility of one or two Indian banks becoming truly global in nature. Today the top three banks in the world by market capitalisation are Chinese banks while the biggest Indian bank, SBI, does not even come in the top fifty. However, a merger of big with big requires a tough post merger integration effort and may not be the right way to kick start consolidation given its difficulty.
4. Another way to think about mergers could be to consider merging a bank based in the North with a bank based in the South to extend their collective footprint. This will provide the merged bank an all-India footprint but will create some cultural challenges. To manage such a merger it would be better to do it for a big bank with a small one rather than merging two big ones to ease the integration issues.
5. The last approach could build on what we just discussed, of merging a small bank with a big bank. Currently there are six small banks and six large banks. The six small banks?Dena, Corporation, Oriental, United, Vijaya and Bank of Maharashtra have a different starting context and will need to be individually evaluated. It will require for the government to consider the extent of government holding in each to avoid breaching the 50% limit also. It would be important to start such a process by merging a strong small bank with a strong big bank to ensure a positive consolidation momentum.
But any talk of public sector bank consolidation is quite premature unless the government undertakes substantial preparatory work. The process of amalgamation of public sector banks is horribly complicated. The merger of any nationalised bank needs to be approved by Parliament. Also the bank boards do not have any rights in this respect and the schemes have to be prepared by the government. In the circumstances a very useful first step for the government would be to first corporatise these banks. That would make these banks into corporations that then could follow the merger process laid out for listed companies. It would also allow the bank boards to lead in this process.
The new government has a unique opportunity to act on the recommendations of the Narasimham committee to facilitate the creation of a few national champions. Doing this would allow for at least some Indian banks to enter the global league tables and not cede this space completely to Chinese banks.
?The author is managing director, Boston Consulting Group. Views are personal