Even as the financial system is grappling with the impact of the COVID-19 pandemic, the Reserve Bank of India (RBI) is going ahead with the public sector bank (PSB) mega merger plan.
Last year, Union Finance Minister Nirmala Sitharaman had announced the merger of 10 state-run banks into four.
According to this plan, Punjab National Bank (PNB) will absorb Oriental Bank of Commerce and United Bank — which will then become India’s second-largest bank after State Bank of India (SBI).
Similarly, Syndicate Bank will merge with Canara Bank, Union Bank of India will absorb both Andhra Bank and Corporation Bank. Indian Bank and Allahabad Bank will also merge.
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In a press releases issued on March 28, the RBI said all these mergers will take effect from April 1. Branches of Allahabad Bank will operate as branches of Indian Bank from April 1, branches of Andhra Bank and Corporation Bank will operate as branches of Union Bank of India, branches of Oriental Bank of Commerce and United Bank will function as branches of PNB and those of Syndicate Bank will operate as Canara Bank branches from April 1. Depositors of these banks will be moved to the amalgamated entity.
Along with these mergers, the finance minister had also announced a slew of governance reforms. These included appointment of chief risk officers with market-linked compensation. This is a big positive for state-run banks.
Until now, risk management has not received adequate focus in government banks through specialist officers.
The mega merger is a positive step in the path of PSB reforms. PSBs came into existence with the idea of expanding banking services to far flung areas of the country. But five decades after nationalisation, it made very little sense to retain too many state-run banks competing in the same segments. These banks continue to exist at the mercy of government’s aid. Many of them score relatively less with respect to efficiency when pitted against private and foreign rivals.
With this merger, India will have at least six big banks. However, a few questions remain:
One, will the mega merger make these banks strong? Most of these banks have relatively high non-performing assets (NPAs). Merging these banks will not make the NPAs disappear, but it will be like bundling small problems into a big one. Also, capital required to support these banks will be commensurately high.
Two, is there real synergy here? Most of these banks, except the big ones, have strong regional focus. The work culture is also shaped accordingly. The government has taken care of technology synergy by clubbing banks using the same technology platform. But, what about the work culture and regional focus?
Three, why is a bank like PNB, which has a history of poor governance and risk management (remember the Nirav Modi episode), being given the charge of handholding two other weak banks?
Four, has the government ensured that heads of the anchor banks are in a position to lead these mergers? In some of these anchor banks, the term of bank chiefs are getting over this year. A new appointee as bank chief will be walking into a tough spot as he/she will have a herculean task of merging these banks.
Five, state-run banks have strong trade unions that command influential positions in the running of these entities and the policy formulation for decades. Has the government taken these employee unions into confidence? The employee unions have already threatened strike against the merger plan.
Six, what happened to the promise of privatising these banks and the government’s commitment to get out of the business? In 2014, the PJ Nayak panel had recommended privatisation of PSBs so that the government will be free of the burden of running these banks.
These are critical questions that the government needs to answer. Also, at a time when the economy is reeling under the shock of the novel coronavirus pandemic, implementing these mergers will likely add extra burden on the bank managements. This is a time when banks need to focus on lending activities to productive sectors to revive the economy while ensuring asset quality. In the context of the COVID-19 crisis, should the government have postponed the mega merger process? It is a question worth pondering over.
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