The merger of ING Vysya with Kotak Bank is interesting as it could be the first in a string of mergers in this segment. Today it is accepted that banks need to consolidate to grow given the pressures of enhancing capital. It is also within the ambit of the medium-term approach of creating large global banks that can scale up and become globally competitive. What are the issues thrown up by bank mergers?
First, RBI should be watchful of such mergers. The reason is simple. On one hand there is demand for more bank licences which has led to the creation of new banks with more to follow. While RBI is to soon start allowing smaller varieties like payments banks, there were over 20 applicants when the window was opened last year which has led to two of them being given permission. The broader issue is it should not be that someone creates a bank only to sell off later at an attractive valuation as our banking paradigm is based on both creating new banks and consolidation. Therefore, we need to have some checks to ensure that those entering the filed have a long-term commitment. When licences are issued for payments banks, this consideration should be kept in mind.
Second, curiously with ING Vysya being bought up, there is a coincidence of the tendency of more ‘new private banks’ being up for sale. It started with Times Bank, followed by the collapse and subsequent takeover of Global Trust Bank. Centurion Bank and Bank of Punjab too were sold out, which means that besides the institutional led new private banks, Indus Ind (owned by an industrial group), Yes Bank and Kotak Bank would be the players in this set of banks. DCB would be the other player in this field that got converted to a new private bank.
Third, any bank merger would ultimately mean loss of jobs, especially at the senior level where there is an overlap in portfolios. While other staff can be redistributed, the senior positions would be in jeopardy as there cannot be two heads of any business, and while a second level can be created, there has anecdotally been a migration of staff away from the acquired entity. Also, invariably the acquiring bank tends to keep the jobs unless there are specific segments where the acquired bank has a dominant presence. But, in this case, given that we are looking at the entry of more banks into this space, this could be good news as experienced banking professionals could move across laterally.
Fourth, the cost of a merger is also quite high and complex. Besides realigning designations and salaries of staff across two banks, there would be a need to reconsider the duplicity of branches, and ATMs, which is the physical infrastructure, would have to be realigned. Also, interest rates need to be aligned on deposits and depending on the current level of variation, the cost would vary.
Fifth, cultural integration is a major challenge for any merger as even two private banks will have different cultures. This starts from how one addresses one another to the work culture which can swing between late hours to a more organised professional approach. This is beyond other factors in the realm of technology which would definitely have been addressed given that all banks are now on the core banking solution that allows seamless flow of transactions across banks and the clearing system. But training would be another area to look for as the level of expertise has to be harmonised across the two entities. If such integration is not brought about, there would be a tendency again for the attrition levels to increase.
Sixth, such a merger would set the tone for further such action as the niche banks would become potential participants as they do have strong presence in their geographies and hence become the ideal fit for the larger banks looking for inorganic expansion. To give an example, when Bank of Madura was taken over by ICICI Bank, it increased the latter’s presence in the southern region. A strong bank looking for this mass can look at such niche banks, which are well run, as possible takeover ideas. Even in case of the Kotak-ING Vysya, there is a strong southern territory as well as SME base which has been acquired by the acquiring bank. At another level, some of the niche banks could introspect and review their prospects in the future given these changing equations. In fact, several of them with a strong priority sector lending portfolio would be attractive for potential buyers.
Seventh, the same holds for public sector banks too. There has been a lot of discussion on the merger of such banks. Here, of course, the motivation is different as the ownership remains the same. But there has been a strong voice for merger of smaller banks with bigger ones, with the SBI associates being high on the agenda. While such mergers will take time given the complexity of the issue, as unlike for private banks where commercial and shareholder interests supersede those of employees, the same does not hold for PSBs as closure of branches and redeployment of staff in large numbers would be a logistical issue that will have a lot of opposition. With the current merger giving Kotak Bank a considerable size, the idea of mergers could be opened up for serious discussion among these banks now.
Therefore, bank mergers, which will dominate the banking canvas in the times to come, will help the system leverage the advantages that go with size and synergies. At the periphery, there will be some pain given that the status quo is shaken in any such arrangement. With several challenges of size, capital, coverage, inclusion, competition, global presence, viability, etc, bank mergers appear to be the new order.
The author is chief economist, CARE Ratings. Views are personal