Public Sector Bank Mergers- A myth becoming a reality?

About thirteen years back when an article was penned in this magazine ( ‘Bank Mergers - The fall out and shape of things to come’ –M&A Critique Issues October to December 2004), it was foretold that eventual mergers of Public Sector Banks (PSBs) in India was an economic necessity for becoming globally competitive by acquiring the required critical mass. This fond hope was cherished not as a pipe dream or as a wishful thinking but as an ultimate global survival strategy. It was founded on a strong belief and repeated aversions from the Committees on Banking and Financial Sector Reforms, to have not more than three or four large public sector banks by merging the existing ones. The Finance Ministers, regardless of their political affiliations have invariably lent their lip sympathy to PSB mergers. Even today the economic compulsions to become true global players by taking the inorganic growth route remain the same but it is now evident that the socio-political ground have not permitted for such an eventuality in the near future! When a strong case was made-out for PSB mergers it was not without apprehensions. The roadblocks were clearly visualized even at that time as under.

The flip side-Chemistry of bank mergers

M&A in the service industries, more particularly in the financial sector will have to contend with substantially different fall outs viz a viz the M&A in the manufacturing industries. On the one hand, an almost seamless product homogeneity (money being the stock in trade) in different banks may seem to encourage M&A other factors may prevent such a course

Culture: Most public sector banks (and some regional private sector banks) have over the years developed (quite often subconsciously) their own working and management culture. It is a very subtle trait invisible to the naked eye yet encompasses several facets of the organization right from recruitment, placement, training, and promotion internally and customer and peer relationship externally. When banks with different cultures merge the fall out could dampen the synergies of merger.

Regional affinity/bias: This again is a unique phenomenon in banks having a similar bearing as the culture. The negative fall out could be imminent when there is a cross-fertilization of cadres in the merger of two banks with different regional bias. So also for customer loyalty
Human factor: When a public sector bank acquires a strong private sector bank or vice versa, cadre placement and pay scale will have to be carefully worked out to prevent resentment and heartburn which will eventually tell on the efficiency. There are instances where highly designated executives in private sector banks were fixed in the junior cadre after the merger (of private sector banks with PSBs).

When two strong public sector banks merge cadre fixation may not be a serious hurdle since there is uniformity in scales and cadres of public sector bank employees. But post-merger their placements may generate heat.

Loss of identity: Especially when two strong banks merge one of them will have to contend with losing its identity unless both lose their respective identities for a common name. The sheer probability of loss of identity will come in way of any strong public sector bank willing to merge with another.
Compatibility of technology and System and Procedures: Most public sector banks have invested substantially in their technology up-gradation (Tens and hundreds of crores) in the last few years. Each bank works on different platforms, different databases, networks and so on. To ensure even a physical compatibility reducing the system and procedures to a uniform base will be a serious affair. Speaking of strong public sector banks merging, which of the merged entities should sacrifice its technology will be an equally serious poser. Even if this is worked out to change the mindsets of the employees ( the mean age of public sector bank employees is 30 to 35+ when the learning curve drops sharply) to adapt to a new system is even a more serious challenge.
Political will for mega-mergers of public sector banks…. The Finance Minister has, in most of his meetings, urged and espoused the cause for fewer but larger and healthy public sector banks. He has been encouraging banks to merge to reap all the synergies. But will the left parties in the coalition tow his line? Even today public sector banks have very strong employee unions and most of the unions are left to extreme left affiliated. Will they stomach another VRS (a glorified CRS) an imminent fallout of mergers.

It was foretold that eventual mergers of Public Sector Banks (PSBs) in India was an economic necessity for becoming globally competitive by acquiring the required critical mass. In spite of these apprehensions, it was inferred that the inevitable can never be deferred indefinitely. There has to be cost cuts, fat trimming and avoiding of overlapping of efforts, for the same piece of pie. Cultural heritage will have to give into raw economics and sound business sense. Regional interests will surrender to achieving global hegemony. Comrades in the workforce have to fine-tune themselves with the market forces. Identity effacement will ensure a better facelift and a newer healthy look. Interfacing technologies (or even demolishing the existing) will pave way for a seamless data exchange and transaction processing across different dimensions. All the same how exactly the consolidation will take place is a big question. Even experts may not like to hazard a guess, for it is a case of pondering into improbable. One thing is for certain. Commercial consolidation will precede legal consolidation. The case of State Bank of India and its subsidiaries is a classic example. Working on the same platform they will all eventually merge into a single legal entity to become one of the largest banks in the world. En-route they may even acquire strong healthy banks both private and public. Thus it will be observed that the cue for PSB mergers was based on the mergers of SBI with its subsidiaries. Unfortunately, even this has not completely seen the light of its day. After all, the apprehensions have far outweighed the optimism how so ever well founded. A few developments since then and certain inherent factors inimical to the mergers need to be further explored.

First of all the Government has diluted its own equity base with most PSBs which have gone public. Many of the banks launched their public issue with hefty premiums and almost invariably they have been oversubscribed several times. This has enthused tremendous confidence in the leadership and management of these banks to go it alone.

Secondly, even those PSBs which were then considered ‘weak’ have successfully turned around and are doing very well on the bourses, lending a very strong credibility factor.

Thirdly, all public sector banks are now making sumptuous profits. The moot question is whether mergers will further enhance the profitability. Banks will like to be left alone rather than venture into tinkering with probabilities.

Fourthly, banks’ stocks continue to outperform the others in the ‘Exchanges’ making them severally better investment options. A fewer banks thru mergers will constrain this option

Fifthly how exactly to choose the banks for mergers, determine their exchange ratios etc. will become an equal poser.

Sixthly, the recent global economic meltdown has witnessed a complete demolition of yesteryears’ great players. Big names have vanished overnight. The bigger names which were seen as potential candidates to acquire some of the strong Indian banks, both private and public are tottering themselves and making an existence by government dole-out. In fact, it is the Indian PSB system which has been left almost unscathed by the meltdown. The entire credit should indeed go to the watchful eyes of our regulator/s. This single instance is sufficient cause for the left parties to uphold their theory of continuity of the existing system without interference.

Lastly, the politics of PSB leadership viz. the Board and the bank management should never be underestimated. One look at the constitution of the Board of Directors of the large PSBs as per the Banking Companies’ (Acquisition and Transfer of Undertaking) Act 1970 will be a good pointer.

Sec 9(3)(a) provides for a (full time) Chairman and Managing Director. This position is almost invariably filled in by appointing one of the senior Executive Directors in the system. The same section also provides for two additional whole-time directors (normally called Executive Directors). These positions are filled by existing General Managers in the system thru a selection process where absolute merit may not alone be the deciding factor. Other things remaining the same the selection more often than not go in favour of ‘candidates with connections’. Be it as may, imagine a situation where we see only 3 large public sector banks against the present 20 PSBs. It means in one stroke 51 whole time Board level positions will get redundant under Sec 9(3)(a). It also means the career path of 51 eligible General Managers will come to an end.
Sec 9(3)(b) provides for a Central Government nominee on the Board. The position goes to a senior bureaucrat. It means 17 potential bureaucrats will lose their candidature.
Sec 9(3)(c) provides for an Expert in matters relating to regulation or supervision of commercial banks, to be nominated by Central Government on recommendation of Reserve bank of India. It again means 17 board level positions will get redundant.
Sec 9(3)(e) provides for a Director representing the workman employees in the bank. Means the same as above.
Sec 9(3)(f) provides for a Director representing the officer employees in the bank. Means the same as above.
Sec 9(3)(g) provides for a  person who is a Chartered Accountant by profession, to be nominated by the Central Government in consultation with the Reserve Bank of India. 17 positions get redundant.
Sec 9(3)(h) in the General category. There are 6 Board level positions to be nominated by the Central Government. However, on election of Directors by shareholders (maximum 3 in number) under Sec 9(3)(i) below an equal number of Directors under this section 9(3)(h) will retire.
Sec 9(3)(i) provides for persons having “Fit and Proper status” (max 3) to be elected by the shareholders.
Thus save Sec 9(3)((i) all Board level positions are to be nominated by the Central Government i.e the constitutional head as recommended by the cabinet/ministry in power (albeit as put up by the bureaucracy). These are days of coalition politics with each party having its finger on the pie. No coalition government can risk abolition of at least 185+ number of coveted Board level positions in the PSBs (assuming 3 against the existing 20) at one stroke. Barring exceptions, these are positions which are normally distributed to loyalists who cannot be otherwise accommodated elsewhere.  As things stand coalition politics will continue for quite some time to come. Therefore unless there is a strong single party at the center committed to the economic reforms, mergers of PSBs will remain a myth and far cry, how so ever the idea may be well conceived.

Conclusion

Merger of PSBs in the near future is not even a possibility, leave alone all probabilities. However one needs to recognize that merger is an economic necessity not merely for global reckoning but even as a survival strategy. To allow these banks to bask on their present glory will be myopic to say the least. Forces of competition and laws of economics do not respect political pressures how so ever strong. Without hazarding a guess as to when the PSBs will merge one can definitely expect these banks to take alternate routes by coming together in joint ventures to cross-sell non-banking products as a beginning. We already see signs of these as more than one bank come together (recent case of Union Bank of India and Bank of India tying up with Japanese Insurance giant Dai-ichi). In today’s international scene banks across the globe are pondering over coming together to face the consequences of the meltdown. Sooner or later we will see a few of them merge or be acquired by stronger ones.  The very success story of these ventures will open the eyes of all political cadres to see the synergies of mergers. It is a wait and watch game.