Bank Mergers again at the Most Inopportune Time Raise More Questions than Answers
A strong economy and weak banking can hardly coexist. We have been stuck with weak banking for the past eight years in a row despite executing reforms such as the introduction of the Insolvency and Bankruptcy Code (IBC), the drive for financial inclusion through schemes such as Pradhan Mantri Jan Dhan Yojana (PMJDY) and the introduction of Micro Units Development and Refinance Agency Ltd (MUDRA).
There were 40 bank mergers and takeovers during the post-nationalisation period, including the State Bank of India (SBI) merger. One wonders whether we have drawn lessons from these experiences or otherwise.
Looking at the immediate past, the SBI merger with its associates is yet to deliver the intended results. About 5,000 branches were wound up, guillotining the reach to the rural clientele. Decision-making is at its lowest speed. Informed sources say that the merged associate bank staff at all levels are looked down upon by the pre-merger SBI. Motivation is at its lowest level.
Even this was getting settled, the second bout of merger took place with the Bank of Baroda (BoB), Vijaya Bank and Dena Bank. While the SBI balance sheet took two years to come back to profit, that of BoB jumped to profit at the end of the first year itself. Obviously emboldened by the apparent frictionless mergers in the immediate past, the ministry of finance (MoF) announced merging 10 banks into four.
Could this have been at any worse time than now, when headwinds of slowdown are blowing hard and global uncertainties are on the rise, with trade wars raging between the US and China and our own economy’s GDP growth tanking to 5% this quarter, the lowest in the past eight years?
Twenty five years have passed since the Narasimham Committee recommended merger for six large banks but warned that it should not be a combination of weak banks.
Watch out: just eight months ago, all the targeted banks were under the prompt corrective action plan (PCA). Nine out of the 10 have net non-performing assets (NPAs) above the danger level of 5%. Further, all these banks are to be recapitalised meaning that they are weak upfront on capital.
Further, lately, their balance sheets are saddled with derivatives and guarantees that may move up and add to the losses. Therefore, those targeted for merger are weak banks and not strong ones.
Dr YV Reddy, D Subba Rao and Raghuram Rajan on one occasion or the other have cautioned the government over consolidation of Indian Banks as a panacea for the ills of the banking system.
While past accomplishments are no guarantee for future success, past failures can serve as good foundation for enduring success. Financial analysts like Anil Gupta of ICRA feel that the merging banks require harmonisation of asset quality and higher provisioning levels among the merging banks.
Every merger or acquisition is expected to create value of some kind from synergy, and yet all the statistics show that successes are in the minority and failure can be quite expensive.
Excepting that all the targeted banks have technologies in sync, no other synergies are seen on the horizon. Each suffers from a heavy baggage of NPAs with several of them in the uncertain National Company Law Tribunal (NCLT) window.
Banking is all about financial intermediation. People both before and behind the counters are at the epicentre of banking. Culture of institutions is intertwined with the diverse cultures spread across the country. Success of mergers across periods and nations is elusive with respect to human resources and cultural issues.
Canara and Syndicate Banks are of the same soil and they have better prospects than the rest to derive advantage from the merger. All the other merging banks would struggle to synergise on cadre management, incentive system, risk practices, etc.
Let us not forget that there is a 74% higher spurt in bank frauds in PSBs (public sector banks) than others and several of them emanated from system weaknesses.
It is therefore, important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of an unwieldy nature. Banking basics and customer service can hardly be bargained.
In hindsight, the government decided to start the development banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut out for that job due to their system of funding long-term projects with short-term resources.
McKinsey has recently warned in an article: “Today’s environment is characterized by rising levels of risk emanating from the shift to digital channels and tools, greater reliance on third parties and the cloud, proliferating cyberattacks, and multiplying reputational risks posed by social media. Faulty moves to make risk management more efficient can cost an institution significantly more than they save.” Will the new CROs, when appointed, be capable of taking care of this concern?
In another study on mergers and acquisitions (M&A), Becky Kaetzler et al. argue for a healthy post-merger organisational health index where they say that unhealthy acquirers destroy value, while healthy acquirers create value and tilt the odds toward success.
Leaders considering mergers should first assess their organisation’s own health to better gauge whether or not to take the merger plunge. In the instant case, all the organisations in the target are not at the expected standard of health in the financial sector.
Leadership for transformation and good governance is critical for financial mergers to be successful. These emerging Big Four out of 10 should prove on these two counts that they hold these necessary virtues.
The announcement on governance improvements simultaneously released by the finance minister need a lot more assurance on the selection processes for the independent directors and non-executive chairmen and their roles.
It would, in fact. be prudent to introduce a declaration in 250 words annually for each director detailing his contribution to the organisation so that the board and the directors can measure up the achievements against such statement.
The bigger reform required from the owner is a pledge not to interfere in loan sanctions and move a resolution in the Parliament that no party would indulge in loan write off either for the farm or other sectors unless the areas are affected by severe natural calamities.
Further, higher capital allocation with or without Basel III cannot prevent bank failures triggered by systems, people and processes.
Capital infusion should be done after specific commitments from the capital-deficit banks on the credit flow to the prioritised sectors, revival and restructuring of viable enterprises in accordance with the Reserve Bank of India (RBI) mandates and the recovery of NPAs.
There can be no energy without friction. The envisaged mergers are bound to have friction and it is the future that decides whether this will bring positive or negative energy. Let us not forget the dictum—‘too big to fail’ would eventually require the government to bail them out of any failure that ordinary citizens would not like to see or wish.
(The author is an economist and risk management specialist. The views are personal.)