The government needs to take a serious relook at its proposed Banks Consolidation 2.0 exercise. It wants to create a handful of large lenders of global size with a view to meeting the challenges of a fast-growing economy.
The rationale for the merger being touted is that the size of a larger consolidated balance sheet will help the big three or big four banks, emerging post-consolidation, to absorb NPAs in a better manner, allow more investments in technology, and help banks to do what they could not earlier, such as funding infrastructure in a meaningful way. While this works well in theory, one has to look at the ground realities of undertaking another consolidation exercise.
What is required is a thorough study by an independent panel on how the banks have performed after the Consolidation 1.0 exercise. In the meantime, the government has to listen to the stock markets and see where the banks, post-consolidation, figure in the overall ranking of the top 100 companies. Leaving aside SBI, which is in a different class by itself, none of the other PSU banks figure even in the top 50 companies ranked by market capitalisation in the BSE 100. Most of the banks, including Bank of Baroda, PNB and Canara Bank, have a market cap ranging between R1.25 lakh crore and R1.50 lakh crore. On the flip side, India’s largest private sector bank, HDFC Bank, has a market cap just below the combined market cap of all seven banks listed in the top 100. Given that India’s largest bank, HDFC Bank, is ranked 97th among the top 100 companies by market cap, where would Indian banks’, post-consolidation, rank? JP Morgan, Bank of America and the two large Chinese banks each have a market cap more than twice that of HDFC Bank.
Agreed, market cap is based on the collective perception of investors at large and may not be the best indicator to gauge the success of consolidation, but it is definitely an important parameter. Making banks too big to fail also comes with its own challenges. The fiasco seen post the US subprime crisis is too deeply etched in people’s memories to be forgotten easily. The bailout was funded by taxpayers’ money. In India, banks have been frequently capitalised and recapitalised again and again. One is not even sure if that money will ever be recovered. Consolidation 2.0 may, however, reduce or eliminate the government having to pump in more and more capital.
Among the other challenges faced in the consolidation exercise is the meshing of cultural differences across various banks. Like any other merger, this is one of the trickiest factors facing banks. While the pressure of trade unions will ensure jobs for all employees, is there really a need for so many employees when technology will be the main plank driving banking operations? As seen post the first consolidation, the banks are highly overstaffed and hardly any branches have been shut. This, along with the inconvenience caused to customers – albeit short-term – through changes in names, cheque books, bank codes, etc, also has to be taken into account.
Besides, having banks lend capital to infrastructure is more easily said than done. How many of the banks seriously have the skill sets for appraising projects and providing pure project finance without creating a serious mismatch between deposits and lending? IDBI, which was the only bank that used to provide project finance, came to grief when it became a commercial bank. It required a lot of effort to bring it back on line, and even IDBI is now being put up for privatisation!
More than skill sets, the government first has to put proper leaders in place with at least a five-year tenure. HDFC, ICICI and Kotak are examples of how good leaders at the top can drive a bank’s growth. The government cannot continue its practice of parachuting leaders who are nearing retirement age to come and clean up the mess of another bank and put it on the growth path. It should instead take a cue from SBI, which promotes leaders from within – a leader who is already familiar with the systems, knows the pitfalls, and can take a holistic view of where the bank stands and where it should go. A new CMD at the fag end of his career is hardly going to take risks and would rather do nothing until his term ends in a few months. Get leaders from within, or get leaders in the interim from outside the banking system if there is a paucity of employees who can take on the responsibility.
Given the competitive landscape of fintech companies, NBFCs and foreign lenders, the government needs to take a considered view before going ahead with Consolidation 2.0.