Consolidation of PSBs: Challenges Ahead

Consolidation of PSBs: Challenges Ahead

Question: There is talk of consolidating 27 largely disparate PSBs(Public Sector Banks) as per a report by a finance ministry appointed panel. Discuss the challenges of consolidating small PSBs with larger ones.

As per a Finance Ministry appointed panel report, small PSBs could be merged with large ones

1. The government has decided to accept recommendations of the P.J. Nayak Committee report on Corporate Governance in PSBs. Should the consolidation process wait until all major recommendations of this committee have been implemented?

2. Issue of capital adequacy is also important. If big banks are going to take on small ones, they must have adequate capitalisation and better control over non performing assets in comparison to the bank they are absorbing

Given that the government recently allocated lesser sums of the recapitalisation budget to bigger banks saying they were less efficient, the merger becomes questionable

3. Merger initiatives need to be driven by market forces but government influence is expected to be strong. This is despite an investment trust or holding company absorbing the bank shares

4. Bigger PSBs are not always better placed when it comes to NPA management

5. They also have to identify their target banks which are difficult to manage

6. Smaller PSBs in India still need to:

• Reorient their loan portfolios
• Improve operational efficiencies
• Enhance risk management practices

7. Concept and roadmap for consolidation are still very theoretical; practical difficulties have not been addressed

8. Barring a few instances, mergers and consolidations in the Indian banking sector have generally been problematic. For Example, Oriental Bank of Commerce was forced to absorb Global Trust Bank and suffered in the process. PNB’s absorption of Nedungadi bank is another instance of mergers gone wrong.
9. Banking industry is competitive. Merger involves much more than consolidation of balance sheets.

10. Is bigness a necessary precursor for banks to function with efficiency in India?

11. Shareholders of banks being taken over benefit while shareholders of the acquiring bank suffer

12. Old and new generation banks could suffer if there is a merger on account of differing customer mix and procedures even with regard to matters such as cash deposit or withdrawal

13. Unions and Associations also play an important role for merger For example Union Bank of India and Bank of India could not move beyond initial stage because of their unions

14. Related alliances of the merging banks also have to be taken into account. For instance, too many alliances can create complication at the merger stage

15. HR factor also need to be taken into account such as:

a. Disparity in cultural and behavioural patterns of banks
b. Difference in hierarchy and reporting practices
c. Differences in staff regulation patterns
d. Generation gap between employees of banks with two very different cultures
e. Merging and positioning of personnel in specialised departments
f. Differences in the structure of compensation of the two banks in question

Facts and Stats

• During the early 1990s, consolidation of small PSBs with larger ones was first recommended by the Narasimham Committee on financial sector reforms; several finance ministers have also mooted the idea of consolidation of PSBs over the years

• PSBs continue to dominate the Indian banking sector with 73% of market share of assets and 83% of branches

• Banking system is controlled by commercial banks

• Following nationalisation of 14 major commercial banks in 1969 and nationalisation of another 6 banks in 1980, there has been rapid expansion of the Indian banking system

• A major reform in the PSB sector is allowing the public sector banks to be listed on the stock exchange and accessing capital markets for augmenting equity subject to government control
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