While India needs big banks, the timing may not be right as banks need to focus on cleaning up their balance sheets first

The government has raked up the issue of mergers among public sector banks after a long gap. Finance Minister Arun Jaitley said in his budget speech that a roadmap for consolidation will be spelt out, and that was followed up by an announcement to set up an expert panel to look into the issue of consolidation.
Consolidation among public sector banks was also in the agenda of the previous United Progressive Alliance government’s Finance Minister P Chidambaram but the then government wanted the proposal to come from bank boards which never materialised.
However, the stance of the present government has been vastly different. In the first edition of Gyan Sangam, the bankers’ retreat organised by the finance ministry in 2015, government officials tested waters by floating the idea of consolidation. Bankers unanimously said that the time was not ripe for consolidation.
“After discussing the matter at length it was agreed that the current time is not opportune for consolidation and that the need of the hour presently is to strengthen the banks by empowering them with operational flexibility be it in the area of recruitment, or in differentiation on core capabilities,” according to the minutes of the working group of Indian Banks’ Association which met to discuss consolidation in July last year.
“Also it was envisaged that consolidation as and when the environment is congenial for the same is not going to happen through individual initiatives of the banks. The banks have to be driven towards the process though appropriate mandate by the major stakeholder i.e. government of India,” according to the note reviewed by The Hindu.
The finance ministry got the cue that the consolidation process has to be driven by the government.
Gyan Sangam
So, during the second edition of Gyan Sangam, which took place earlier this month, discussions were not on whether consolidation was needed. The discussion focused on how to consolidate, said bankers who attended the retreat, highlighting the government’s resolve to push mergers among public sector bank.
The need to have large banks cannot be over-emphasised. No bank in the country features in the top ten banks in any global list, in terms of asset size. State Bank of India – the country’s largest bank - is the only lender in the top 100-bank list. Given the huge large infrastructure needs of the country, large banks are required to finance it.
Consolidation will also increase capital efficiency, apart from improving the ability of banks to recover bad loans which are rising, experts said.
“There are two advantages to consolidation. One is that capital can be used more efficiently. The merged entity will have more leg-room to raise capital,” said Ashvin Parekh, Managing Partner – Ashvin Parekh Advisory Services.
“At a time when non-performing assets are high, and banks are putting more effort in loan recovery, the ability to recover by a smaller number of banks will be higher though an individual bank’s exposure may go up. Lesser number of voices could find cohesion.… in the joint lenders’ forum today, there are too many voices and each lender has a differential right with the borrower and often, they do not agree to a common recovery programme. With consolidation, the recovery will be far more focussed,” Mr Parekh said.
Key for successful merger
Cost rationalisation is seen as key to success in consolidation. This would result in cutting down branches, particularly in urban areas where there are too many branches of different banks in the area, bankers said.
There is a view that banks from different geographies should be chosen for mergers. For example, a south-based bank could be merged with a bank based in the north of the country. The recent acquisition by Kotak Mahindra Bank of ING Vysya Bank is a case in point, which was primarily driven by the geographical synergies. Before the merger, 15 per cent of the Kotak branches were in south India, which improved to 38 per cent, post-merger.
Pratip Chaudhuri, former chairman of State Bank of India, however, feels public sector bank merger should be between by banks which are in same geographies.
“Lending, particularly to large corporate houses, is not the issue. The main objective is to get retail deposits. If a large bank from north India acquires a small bank from south India, then the merged entity’s south based branches will face difficulty in getting retail deposits,” Chaudhuri said indicating the importance of identity of a bank in a particular region.
When Mr Chaudhuri was the chairman State Bank of India (2011 to 2013), SBI merged one of its associate banks, State Bank of Saurashtra. “Customers of SBS were extremely disappointed.” He felt that branch rationalization could be find room in metro cities, but not in rural areas.
Integration of human resources
The integration of human resources and their culture will also be easier if banks are merged from the same geographies.
The other criterion to identify banks for mergers is the technology platform. Different banks have different platform developed by IT majors. To merge two banks having different platforms could lead to challenges during integration, bankers said.
But to come back to the original question, is the timing right? In the last Gyan Sangam, bankers opposed the idea on ground that the health of their respective banks does not allow them to takeover other banks. The situation has not improved in one year; rather it has further deteriorated if the quarter ended December 2015 results are considered. Many banks, including Bank of Baroda, IDBI Bank and Bank of India reported record losses.
“The overall observation that I will make is any time is a good time for consolidation. The real good time when consolidation should have happened is between 2005 and 2008 when the going was good. The issues that we are facing today, of NPA and recovery, was not there then,” Mr Parekh said. “The other window that was available was between 2012 and 2014, when things started looking good. Today is the worst time,” Mr Parekh added.
Employee unions
Also, the government may not find it easy to circumvent employee unions in banks in the consolidation journey. The unions have already started opposing the proposed privatization of IDBI Bank, in which the government said it would consider lowering its stake to below 50 per cent, and have called for a strike on March 28 to demanding reversal of the decision. “What do we need? Big banks or good banks?” asked Vishwas Utagi, vice president, All India Bank Employees Association.
Cost rationalisation is key to make consolidation a success and this may reduce branches in urban areas