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Does It Really Make Sense to Merge Public Sector Banks?

Apr 27, 2016


The government of India owns twenty-seven public sector banks (PSBs). It has often been suggested that the government should not be owning so many banks. Many of these banks are very small and hence, they should be merged so that they benefit from the economies of scale.

The situation was summarised by R Gandhi, deputy governor of the Reserve Bank of India, in a recent speech. As he said: "[The] banking system continues to be dominated by Public Sector Banks (PSBs) which still have more than 70 per cent market share of the banking system assets. At present there are 27 PSBs with varying sizes. State Bank of India, the largest bank, has balance sheet size which is roughly 17 times the size of smallest public sector bank."

Gandhi further said: "Most PSBs follow roughly similar business models and many of them are also competing with each other in most market segments they are active in. Further, PSBs have broadly similar organisational structure and human resource policies. It has been argued that India has too many PSBs with similar characteristics and a consolidation among PSBs can result in reaping rich benefits of economies of scale and scope."

The first thing that needs to be mentioned here is that most mergers fail. There is enough research going around to prove that. As the Harvard Business Review article titled The Big Idea: The New M&A Playbook points out: "Companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%."

Hence, it is safe to say that most mergers fail and it is best to start with this assumption when any merger is proposed. And there is no reason to believe that the story for Indian public sector banks will be any different.

There have been two kinds of bank mergers in India. The first kind is when a bank which is about to fail is merged with a strong bank. The Sector 45 of the Banking Regulation Act 1949 empowers the RBI to "make a scheme of amalgamation of a bank with another bank if it is in the depositors' interest or in the interest of overall banking system."The merger of Global Trust Bank with Oriental Bank of Commerce in 2004 is a good example of this. As Gandhi said in his speech: "Prior to 1999, most of the mergers were driven by resolution of weak banks under Section 45 of Banking Regulation Act 1949. However, after 1999, there has been increasing trend of voluntary mergers under Section 44A of Banking Regulation Act 1949."

The second kind of merger is the voluntary merger. As far as voluntary mergers go, a good example is the recent merger of ING Vysya Bank with Kotak Mahindra Bank. This merger had the so called synergy necessary for a merger to take place.

As Gandhi said: "One and most obvious has been voluntary merger of banks driven by the need for synergy, growth and operational efficiency in operations. Recent merger of ING Vysya Bank with Kotak Mahindra Bank is an example of this kind of consolidation. ING Vysya Bank had a stronger presence in South India while Kotak had an extended franchise in the West and North India. The merger created a large financial institution with a pan-India presence."

The merger of Bank of Madura and Sangli Bank with ICICI Bank in 2001 and 2007, and the merger of Centurion Bank of Punjab by HDFC Bank in 2008, are other good examples of synergy based mergers.

But what does the word synergy really mean? One of former professors used to say that: "Since we are all born on this mother earth, there is some sort of synergy between us." That was his way of saying that synergy is basically bullshit. Once a merger has been decided on then people go looking for reasons to justify it and that is synergy. While that may be a very cynical way of looking at things, there is some truth in it as well.

Nevertheless, author John Lanchester does define synergy in his book How to Speak Money. As he writes: "Synergy: Mainly BULLSHIT, but when it does mean anything it means merging two companies together and taking the opportunity to sack people." He then goes on to explain the concept through an example.

As he writes "If two companies that make similar products merge, they will have a similar warehouse and delivery operations, so one of the two sets of employees will lose their jobs. The idea is that this will cut COSTS and increase profits, though that tends not to happen, and it is a proven fact that most mergers end by costing money...When two companies merge, the first thing that ANALYSTS look at when evaluating the deal is how many jobs have been lost: the higher the number, the better. That's synergy."If two public sector banks are merged there are bound to be situations where both the banks have a presence in a given area. Synergy will demand that one of the branches be shut down. But given that the banks are government owned something like that is unlikely to happen.

Over and above this, there will be multiple people with the same skill at the corporate level. Will this duplicity of roles end, with people being fired? Highly unlikely.

Hence, the merger of two public sector banks, will give us a bigger inefficient bank. Further, there are very few examples of public sector banks being merged in the past. So, there is nothing really to learn from.

As Gandhi said: "Recent merger of State Bank of Saurashtra and State Bank of Indore into State Bank of India may be seen as basically merger among group companies. The only example of merger of two PSBs is merger of New Bank of India with Punjab National Bank in 1993. However, this was not a voluntary merger."

Also, it is worth remembering that public sector banks are facing huge bad loan problems. Many corporates who had taken on loans are not repaying them. In this scenario, if banks are merged without the bad loan problem being solved, we will have a situation where problems of two banks are basically passed on to one bank. That doesn't make the situation any better.

As Gandhi summarises the situation: "PSBs as a group have not been performing well during the last few years. There has been a large increase in Non-Performing Assets (NPAs). As a part of managing large NPAs, some suggestions have been made that perhaps a consolidation of PSBs can render them more capable of managing such challenges relatively better...Merger of a weak bank with a strong bank may make combined entity weak if the merger process is not handled properly. The problems of capital shortages and higher NPAs may get transmitted to stronger bank due to unduly haste or a mechanical merger process."

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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9 Responses to "Does It Really Make Sense to Merge Public Sector Banks?"


May 2, 2016

PSBs are subjected to politically directed lending and other social lending with poor recovery rate. Bankers have no choice on their own to avoid it. If Air India is suffering loss, it is due to political decision taken to run it that way by providing all sorts of concessions to various political entities and other unproductive activities. Similar is the case with PSBs. But notwithstanding the said negative features, some of the PSBs have done well and they continue to do well. Banks like Punjab National Bank with their huge reserve are definitely star performer even in worst times. If decidion is taken to make it a private bank, it will be number one bank in private sector in no time.

But PSBs have made the life of common man easy and remain accessible all the time. They follow ethical practices and are rather transparent. Whereas there is lot of veil in the operation of Private Sector Banks. Due to inefficient legal system banks find it difficult to recover. It is due to poor political and legal system, banks are put to difficulty. Once PSBs are destroyed, there will not be much of lending to small and medium borrowers in Agriculture, small industries and other activities. Only Large borrowers will have access to credit. Private banks will be keen to lend on sonsumption schemes.

May be Vivek Kaul would like such a thing to happen!


R. Asokkumar

Apr 28, 2016

I think a well planned merger will make a lot of sense in Indian context for all stake holders. Merger will result in lower cost of operations as less no of employees and less space will be required to handle the merged business. It doesn't mean that people will have to lose jobs. If two branches in the same locality/village/center are merged into one,another branch can be opened in a nearby locality/village/center improving the outreach and business. The surplus employees can be employed in hitherto neglected areas in Public Sector Banks, namely, marketing and after sales service.The merger will succeed only if substantial investment in upgrading technology and business process re-engineering are taken up simultaneously. But the merger will come to nought if corporate governance does not improve and political interference continues.


Aman Kumar

Apr 27, 2016

I work for one such mid size PSB. The problem of NPA is big, but there is another bigger acute problem. Its the issue. New POs(asst manager) are forced to do loans and that to without formal training. The industry is vast and still the newly recruited staff having commerce background can be duped. That's why more scams are taking place. Second attitude of the staff. I admit that PSB staff are rude and are like rakhi sawant of Bollywood. They even strangle and fight among themselves.... The banking industry is in the second stage of cancer.



Apr 27, 2016

several permutations & combinations are being cooked for heralding a NEW & BIG banking experience in India. However, with the introduction of 4G, the present banking transactions happening will certainly change. As such, STATE BANK OF INDIA must get the LEAD BANK of a STATE. But, the career path of Officers & Employees of all Public Sector Banks must be taken care of. TRANSFERS of Officers and Employees in PSBs too must undergo transformation and the dependents of Officers and Employees should never ever suffer.



Apr 27, 2016

Dear Sir,if you merge the PSBs,at least we can reduce duplication of loans by some unscrupolous business houses.When there are many banks,with out disclosing many borrowers are borrowing loans from different banks ,some times on the same assets as collateral,by using the weakness and loop holes of the system.If the PSBs are less in number to certain extent this can be avoided.More over the unhealthy competition can be eliminated among the PSBs, particularly in mobilising deposits.


Ian Lewis

Apr 27, 2016

In fact, it would have been better for ALL public sector banks to be merged when they were first nationalized. That way, we would have been dealing with A BANK which would not compete with other PSU Banks. Such a BANK would realize economies of scale and would be an apt instrument of the then socialist regime under Mrs. Indira Gandhi.

The only advantage I see with having multiple PSU's is to provide jobs for the boys and hide inefficiencies and looting.

I don't see privatization of banks happening for a long time to come. When was the last time a PSU offered its shares in a FPO?

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Apr 27, 2016

Looking to the present situation in the banking sector such as increasing NPA's by big corporate houses at the cost of common customers, non fulfilling the common customers needs it is in my view all public sector banks must be merged and it should formed as Corporation just like Life Insurance Corporation of India.

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Vipul Jasani

Apr 27, 2016

This is the reason I am fan of Vivek.

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AB Pereira

Apr 27, 2016

Just because some ineffective, inefficient capitalist blokes have handled M&As in the past and such M&As have failed does not mean that Indian PSU banks should not be merged. Given a chance, I have a plan of merger where not even one job will be lost but number of branches will be cut (saving on rent/capital expenditure), every human resource will be motivated, equipped and trained to do their job better, every good or bad loan of the new bank will be managed... However, I am a small fry, who will listen to me?
Same situation is happening around the world, in central banks and governments - they take decisions that does not benefit the masses, it helps a small number of capitalists and investors to make money in markets. If these central banks are entrusted to our bright but small common man, Mr RRR of our RBI, half the ills of the world will be cured.

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