Besides State Bank of India (SBI), the state-owned banking behemoth, another mighty public sector bank will be Bank of Baroda (BoB) with the amalgamation of Vijaya Bank and Dena Bank with it. It will be another historic step in revamping PSU banks, which was in abeyance since the banking sector reforms were initiated in 1991.
The consolidation is not confined only to resolving the lingering bad loan crisis. It has a bigger purpose to make PSU banks more robust and capable so as to (i) increase lending appetite (ii) become globally competitive with large asset size (iii) conserve capital (iv) improve risk management capabilities (v) attain economies of scale in augmenting business growth (vi) create bigger PSU banks to take larger exposure to infrastructure and industry, (vii) and improve operational efficiency to reduce cost and improve quality of banking services.
In fact, the idea of consolidation of PSU banks originates from some of the unimplemented recommendations of the first Narasimham Committee on the Financial System (CFS 1991). It was also reiterated in its second committee on banking sector reforms (BSR 1998), which proposed a substantial reduction in the number of PSU banks. The redefined structure should have 3-4 large banks with international reach; 8-10 national banks followed by a set of local and rural banks. Merger of PSU banks was also recommended in the report of the working group on restructuring of weak banks led by MS Verma, former Chairman of SBI (1999).
Impact of Amalgamation
BoB will be the third largest bank with a business of Rs 15.4 lakh crore after SBI (Rs 45.85 lakh crore) and HDFC Bank (Rs 15.8 lakh crore). ICICI Bank will be the fourth largest bank with Rs 11.02 lakh crore. The market share of BoB after the merger will increase to 7.15% from 4.1%. The branch strength will rise to 9,511 from 5,546 providing better synergy of outreach in south and west. With stronger fundamentals of Vijaya Bank, the new entity will be able to absorb the accumulated high gross NPAs of Dena Bank. There will be a perceptible improvement in capital adequacy ratio and provision coverage ratio.
The number of PSU banks will come down from 21 to 18 if IDBI Bank with a majority stake of LIC is considered as a private bank, which is still a contentious issue. Though SBI is a PSU bank, it is governed by the SBI Act 1955 and not by the Banking Companies (Acquisition and Transfer of Undertaking) Act 1970. With the present consolidation taking place in the 50th year of bank nationalisation, the number of nationalised banks is coming down to 17.
One of the nationalised bank — New Bank of India – was merged with Punjab National Bank in 1993. The newfound power of three can work wonders to set new standards in operations and quality of services provided the challenges immediately after the merger are handled deftly.
With an employee base of 85,675, the foremost aspect will be to motivate, merge the mindsets and take care of the interests of its employees coming from two other banks with different cultural mix. Harnessing their competencies to enable the growth of the new entity will be the key to success of the enlarged BoB.
The common mindset is never to disturb the applecart even if synergy in consolidation is clearly visible. It will call for mapping skillsets and talent of every class of employees of all the three banks to enable better deployment of manpower and assigning responsibilities to lead profit centres. Procrastination in taking such strategic actions may dissipate the merits of consolidation.
Helping the new set of employees in overcoming the emotional impact of losing its parental corporate brand image with which the employees have been associated and recognised in society for decades will be crucial. People with diverse age profile and independent mindsets follow different risk appetite in parent banks. The vision to transform human resource policies to create a compatible operating ecosystem will be critical at the early stage to infuse confidence among the merging workforce. BoB must explore the new exuberance to create bigger space in augmenting business with focus on differentiated quality and sustainable value proposition to the widened customer base.
Secondly, while the operational transition would be seamless as the technology platform is uniform – Finacle of Infosys – the other support systems have to reinforce and complement with suitable systemic controls to provide a safe and secure integrated operating system. These include integration of workflows, standard operating procedures by bringing together a coherence among key policies, trimming organisational structure, redefining lines of business, empowerment of line management and removal of barriers in execution so on.
The innovation of systems, processes and reorganising reporting relationship have to be well planned. Equally critical will be to take a pragmatic call about closing down operational units based purely on business considerations and mutual reciprocation. It will need a well-calibrated identity neutral approach to trim flab.
If the real benefits of consolidation in PSU bank space are to be derived, certain much-awaited bank reforms will have to be quickly and simultaneously implemented. It has to begin with improved corporate governance and added rigour in regulating the board level performance. The present move is built upon the success of SBI associates merging with its parent entity but this amalgamation is fusing together three different cultures.
The synergy of the bold bank reforms will have to be fully derived to infuse renewed optimism among PSU banks. It will need inclusive ownership of all stakeholders in pursuing post amalgamation adjustment so that such large and strong banks can be strategic players in the global banking space. Its success will pave the way eventually for speeding up next generation bank reforms, which should be capable to efficiently and safely conduct financial intermediation in an economy that is set to touch $10 trillion by 2030.
(The author is Director, National Institute of Banking Studies and Corporate Management, Noida)