The Centre is working on a proposal to integrate all small and medium-sized PSU banks into 12 large-sized banks in the medium term and eventually to create three to four global banks in the size of State Bank of India (SBI) — the country’s largest bank.
Post merger of its associate banks with SBI, the number of state-owned banks in the country came down to 21, which will be coalesced into 12 in the short to medium term. The plan is large-sized banks such as SBI, Bank of Baroda, Punjab National Bank, Bank of India, Canara Bank and Union Bank of India will acquire small-sized banks such as Dena Bank, Bank of Maharashtra, Vijaya Bank, Corporation Bank, United Bank of India, and Indian Bank, among others.
Punjab and Sindh Bank and Andhra Bank, though relatively small entities, will continue to exist in their respective areas in view of their regional strength and brand equities.
This is not new thinking. The government has been seized with the idea for over a decade now of creating three to four giant banks under its Basel III obligations. Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing leveraging.
The aim is to create fewer Indian banks that will compete with world class banks. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters namely capital, leverage, funding and liquidity.
At present, Indian banking system follows Basel II norms. The Reserve Bank of India has extended the timeline for full implementation of the Basel III capital regulations by March 2019.
In the last consolidation drive, five associate banks and Bharatiya Mahila Bank (BMB) became part of SBI April 1, catapulting the country’s largest lender to among the top 50 banks in the world.
Enthused by this success, the finance ministry is considering clearing another such proposal by this fiscal. The NDA government might have pushed the proposal through earlier had it not announced demonitisation last November. It was also part of the terms of reference of the bank board bureau (BBB) under former Comptroller and Auditor General Vinod Rai.
The exercise, however, will be difficult. After demonetisation, it will disrupt the banking system. The huge NPA burden is a challenge before the government. The latter has to weigh various options and niceties before carrying out such mega mergers. Staff issues, valuation of banks and their fixed assets are other thorny issues that will trouble the government.
Factors such as regional balance, geographical reach, financial burden and smooth human resource transition have to be looked into while taking the merger decision. Other strategic issues such as the merger of a very weak bank with a very strong bank will work against the interests of the latter.
Another cogent factor that should weigh on policymakers is brand equity of banks among their customers. Over decades, nay a century, PSU banks have evolved into unique institutions. They possess unique strains of character and monolithic culture. It is not only their different colours and logos that set them apart from one another.
Every bank has a unique culture about it. Kolkata-headquartered banks such as UCO Bank, United Bank of India and Allahabad Bank are moderate and have a different work style and orientation from Mumbai-headquartered banks such as SBI, Bank of India and UBI which are more aggressive.
Entities headquartered in Delhi such as Punjab National Bank are blithe and different from those having originated in the south such as Corporation Bank and Canara Bank whose culture and work ethics are principled.
Although all PSU banks guide themselves by the overarching objectives of commercial profit and social welfare, each has inherited its individual work ethics and culture. They are different from one another not only in their products, stationery and colours, they are also different in their customer services.
Over a period, customers have identified themselves with their banks. Families over generations have dealt with particular banks. It is not only their interest rates, product profiles or customized services that have retained customers over generations, the latter have an emotional bonding with their banks. Dismantling such a large mosaic of culture built over a century long relationship will never be a cakewalk.
