Bank mergers were long overdue but it also poses challenges

With a sweep of her pen the Finance Minister reduced the number of PSU banks in India from 10 to just 4. Large banks like PNB, Canara Bank and Union Bank became the acquiring banks. The merger was long overdue but there are also some serious challenges ahead.

Helps rationalize costs

PSU banks in India were awful service duplicates. Most banks replicated the same set of banking standards and market insights. In the process, they had to spend much more on branch networks, manpower, administrative costs etc. Now all that can be quickly rationalized. Common services can be shared and overheads can be slashed. The costs so saved can be actually used to give a digital push to banks that is currently lacking. Above all, you now have a handful of banks with a wide reach and are also well capitalized.

Treasury advantages

Treasury operations in most small banks are too small to give them bargaining power in pricing and quotes. Mergers will not only expand the treasury corpus but also help to largely centralize the treasury operations. Rationalization of costs will also happen since duplicate skills will not be required in a larger set up. Being a key profit centre for any bank, this is one area where the advantages are likely to be visible in the short run and will be value accretive.

But, issues are much bigger

The big question that people are asking is whether the merger will really solve the current problems that banks are facing. Banks have just come out of a major NPA restructuring exercise and they still have real problems like IL&FS, Dewan Housing, Jet Airways and NHAI to worry about. These mergers will surely make the banks larger and better capitalized but whether it will really make them more profitable is a moot point. The past experience is that when multiple banks with similar problems merge, it is very unlikely that it would turn out positive unless there is a major revival in growth. That will be the big assumption here. Also, most of these expectations may be belied if necessary changes are not brought in terms of private ownership, greater management leeway and performance incentives.

What about softer issues?

Even as the merger was announced by the FM, the rumblings have already started by the unions. This will result in job losses and nobody wants to bell the cat. Job loss in banks is economically and politically sensitive. With a spate of state elections coming up, the centre may not be keen to rub the powerful unions the wrong way. There is the larger issue of culture because not all PSU banks are the same. A start has been made but practical challenges could be the real stumbling block!