Bank Mergers Again at Most
Inopportune Time
Strong economy and weak
banking can hardly coexist. We have been stuck with weak banking for the last
eight years in a row despite most wanted reforms like the introduction of IBC,
drive for financial inclusion like Jan Dhan and introduction of MUDRA. There were
40 mergers and takeovers during the post nationalisation period including the
SBI merger. One wonders whether we have
drawn lessons from these experiences.
Looking at the immediate past,
SBI merger with Associates is yet to deliver the intended results. 5000
branches were wound up effectively guillotining the reach to the rural
clientele. Decision-making is at its lowest speed. Highly informed sources say
that the merged associate bank staff at all levels are looked down upon by the
pre-merger SBI. Achievement motivation is at its low levels.
Even as such settling was in
the process, second bout of merger took place with Bank of Baroda, Vijaya Bank
and Dena Bank. While the SBI balance sheet took two years to come back to
profit, BoB jumped to profit at the end of first year itself. Obviously
emboldened by the apparent frictionless mergers in the immediate past, MoF
announced merging ten banks into four.
Can this be at any worse time
than now, when headwinds of recession are blowing hard and global uncertainties
are on the rise with trade wars between US and China and our own economy’s GDP
growth tanking to 5% this quarter, the lowest in the last eight years?
25 years passed since
Narasimham Committee recommended for six large banks but warned that it should
not be with a combination of weak banks. Watch out: just eight months back, all
the targeted banks were under Prompt Corrective Action Plan (PCA). Nine out of
the ten have net 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.
Y.V. 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 to 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 from synergy of some kind, 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 heavy baggage of NPAs with several of
them in the uncertain NCLT window.
Banking is all about financial
intermediation. People are at the epicentre of banking both before and behind
the counters. Culture of institutions is intertwined with the diverse cultures
spread across the country. Success of mergers across periods and nations is
elusive regarding the human resource and cultural issues.
Canara and Syndicate Banks are
of the same soil and they have better prospect than the rest to derive
advantage of 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% spurt in Bank frauds in PSBs more 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 unwieldy nature. Banking basics and customer service can
hardly be bargained.
Government after hindsight
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 for that job well due to their 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 M&A,
Becky Kaetzler et al. argue for a healthy Organisational Health Index
post-merger 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 organization’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 health in the financial
sector.
Leadership for transformation
and good governance are critical for financial mergers to be successful. These
emerging big Four out of ten should prove on these two counts that they hold
these necessary virtues.
The announcement on governance
improvements simultaneously released by the FM need a lot more assurance on the
selection processes for the Independent Directors, non-executive Chairmen and
their role. It would in fact be prudent to introduce a Declaration in 250 words
annually as to 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 RBI mandates and 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. It’s to be
hoped that even renewable energy through the cross-culture merger would bring
the intended results. 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.
