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What consolidation of banks means to Indian Economy
Friday June 17, 2016 11:49 PM, Syed Ali Mujtaba,


With the State Bank of India (SBI), the country’s largest bank and the only lender in the top 100 bank list, formally announcing merger of 5 associative banks and Bharatiya Mahila Bank with itself, the process of the consolidation of the public sector banks has finally begun.

The five associative banks of SBI are; State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore.

The merged entity is proposed to have India’s one-fourth of the deposit and loan market. In the post-consolidation phase, SBI’s market share will increase from 17 per cent to 22.5-23 per cent, while the total business of the merged entity is estimated to be over 35 lakh crore rupees.

Are they healthy signs in Indian banking reforms or will it be another policy paralysis of the ruling NDA government. This is what being debated in the country .

Notwithstanding the fact, the NDA government has taken up the issue of merger of the public sector banks with all sincerity of purpose. This was first spelled out; when Finance Minister Arun Jaitley in his budget speech when he stated that a roadmap for consolidation of banks is on the anvil. This was followed by the announcement to set up an expert panel to look into this issue. However, nothing happened since then.

It seems the Finance Minister has once again woken up to the reality that the consolidation of the banks has to be driven by the government. It is with this resolve that this big ticket banking reform is being pushed more vigorously by the current government.

One needs to recall that the consolidation of public sector banks was also on the agenda of the previous United Progressive Alliance government headed by Manmohan Singh. Then Finance Minister P Chidambaram was keen to push this idea and during his tenure, the SBI first merged associate State Bank of Saurashtra with itself in 2008 and then two years later, in 2010, State Bank of Indore was also merged with it.

However, since P Chidambaram wanted this idea to be taken forward by the bank boards and not by the government, this proposal could not take off further due lack of responses from the bank boards.

Since, the idea of consolidation of banks is once again being pursued with new fervour, it is pertinent to analyse the pros and cons of this Indian banking sector reform.

At present, there are a total of 27 public sector banks (PSBs) in the country. Apart from the SBI, all the remaining banks are regional banks. In 2015, SBI was at the 52nd place in the world in terms of assets. In the post-merger, in terms of assets, the combined entity will help India to figure in the top 50 largest banks in the world. In fact it will be figured at the 45th position.

Further, the consolidation of SBI would create a banking behemoth with a balance sheet size of 37 trillion rupees. Its size would be more than 5 times the 7.2 trillion rupees worth ICICI Bank Ltd, which is India’s second largest lender.

As the government is the only common owner of all the PSBs, the process of consolidation could be much easier and effortless. The consolidation will help in leveraging the benefits of economies of scale. Consolidation will help in leveraging the synergies among the banks that have diverse portfolios, focus areas and coverage areas.

Cost rationalisation is seen as one of the key to make the consolidation a success. This would result in cutting down branches, particularly in urban areas where there are too many branches of different banks in a same area. The integration of human resources and their culture will also be easier if banks are merged from same geographies.

The new entity will help in leveraging the synergies among the banks. As a result, it will pave the way for lot of cost benefits and expansion of financial services to remote areas.

Banking sector is suffering from non-performing assets (NPAs) problem. To overcome this, the government is resorting to capital infusion. Consolidation of banks will increase capital efficiency, apart from improving the ability of banks to recover bad loans.

India is the fastest growing major economy in the world. To sustain this growth, there is a need for mega banks that will ensure investments into the large scale infrastructure projects. The consolidation will fill this gap, and help build the ‘Brand India’ among international investors.

Indian companies are going global. Now we are home to many multinational companies that have presence in various sectors of the economy. Again this context, consolidation of banks is the most proper platform to deliver financial services to them.

International experience is also favourable towards banks consolidation. Banks in Japan between 1990 and 2004 gained a lot as a result of large scale merger and acquisition process.

On the flip side, the arguments marshalled are; while merging banks, government will face one of the toughest challenges from the employee unions and the employees who fear identity loss. The unions have already started opposing the proposed privatization of IDBI Bank, in which the government is considering lowering stake below 50 per cent. There are apprehensions among the labour unions that the consolidation of banks will lead to job losses.

Some has opposed the idea on ground that the current health of their respective banks does not allow to takeover by other banks. The situation has not improved, rather it has further deteriorated. The real good time was between 2005 and 2008. The other window available was between 2012 and 2014.

Now many banks, including the likes of Bank of Baroda, IDBI Bank, and Bank of India has reported record losses. So they argue that consolidation should take place in a positive environment and the current situation is not conducive for any such purpose.

Those who oppose the idea further say, if a large bank from north India acquires a small bank from south India, then the merged entity will face difficulty in getting retail deposits from south. Losing the importance of identity of a bank in a particular region could be a major issue to get retail deposits.

Right now the issues that are haunting the banks are Non-Performing Assets and recovery of loans. As per an estimate, publicly traded banks in India added nearly 1 trillion rupees in bad loans between October and December 2015. In such situation will the idea of consolidation of banks will resolve the non-performing assets (NPAs) and recovery of loans issue is being talked about.

The other argument against consolidation is; it ignores the inherent strength of the banking system. It sounds more an escape route to the problems of Non-Performing Assets and recovery of bad loans. In such case these twin problems will remain unaddressed.

The other objection is the idea of banks merger has not taken into consideration the criteria for identifying the technology platform. Different banks have different technology platform which are developed by IT majors like Infosys and Tata Consultancy Services, etc. The merger of two banks having different platform, could create technological problems.

However, after weighing the pros and cons of the arguments, it seems the government is moving ahead with the idea consolidation of banks. It is convinced that it’s better idea to create large banks than having too many banks.

Given the reality, large banks are required to finance the huge large infrastructure needs of the country. The government is of the view that the merged entity will have more leg room to raise capital. It will also increase capital efficiency apart from improving the ability to recover bad loans.

These are all healthy signs for the big ticket banking sector reforms. The projection is such reform would definitely give a big boost to the country’s economy.

[Syed Ali Mujtaba is a journalist based in Chennai. He can be contacted at]

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