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Video Summary

[RSTV The Big Picture] Big Bank Reform

The recent mega-merger of banks involves integration of six weaker PSU banks with four better performing 'anchor' banks is aimed at improving operating efficiency, governance and accountability and facilitate effective monitoring.
By IT's Video Summary Team
September 10, 2019

Contents

  • Introduction
  • What is the Mega merger of Banks?
  • On which basis the merger of particular banks was carried out?
  • Why the merger of PSU banks was necessary?
  • How does the merger improve the performance metrics of banks?
  • Future of Merged Banks
  • Impact of Merger on Economy
  • Concerning issues
  • Steps taken by government
  • Suggestion
  • Conclusion

[RSTV The Big Picture] Big Bank Reform

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Introduction

Big Bank Reform

  • Half a century after the nationalisation of banks, the centre government recently announced to merge 10 public sector banks in to four large entities.
  • This will bring down the total number public Sector Banks in the country to 12 from 27 in 2017.
  • Punjab National Bank, Oriental bank of commerce and United Bank of India will merge to become the second largest bank after SBI.
  • Canara Bank and Syndicate Bank merger will create 4th largest lender of the country and the merger of Union Bank, Andhra Bank and Corporation Bank will create 5th largest Bank.
  • Announcing this merger plan Finance Minister said this will help in consolidating strong national presence and global reach of these banks.
  • This was followed by 55000 crores rupees’ recapitalisation plan for the merged entities and 6 other banks enabling them to enhance their lending capacity.

What is the Mega merger of Banks?

  • The recent mega merger plan of banks focuses on creating banks of scale which would enable India to meet its aspirations of a $5 trillion GDP economy.
  • For the economy to reach $5 trillion, the industry must increase in size proportionally, which requires credit (loans). Now, if the banks are small and weak, they cannot fund new projects.
  • Prudential banking norms required that banks should not take too much of risk on a single company or a single entity and should take risk which is appropriate for their size. Hence, the consolidation of banks is aimed at increasing the lending capacity of banks.
  • Moreover, it is also aimed at answering questions such as do the banks have sufficient heft to be able to invest in technology upgradation, better customer service, fraud detection etc.
  • All of these require investments and bigger the bank, the more ability it has to not only make these investments but standardize those processes in a larger set of customer facing entities.

On which basis the merger of particular banks was carried out?

The merger was carried out while having below objective in mind:

  • Customer disruption during and immediately after the merger process has to be minimal.
  • Credit activity should not get this book disturbed.

The merger of specific banks was carried out based on following points:

Common Software

  • The software across the banks should be common. For instance, Canara bank and Syndicate bank are using similar banking software. Indian bank and Allahabad bank are also using the common software.
  • A group of six bank were using a common software (named Finacle). However, it was extremely difficult to combine all six banks due to increased complexities. But it can be broken in 2 groups having 3 banks each

Unlocking Synergy

  • The second parameter was to complement the each merged banks with other in terms of its traditional rich history, current capital availability, level of NPA, distribution of their branches etc.

Other parameters

  • Within above two parameters, there were other parameters such as Geographical presence, line of Activity and extent of savings bank deposits (CASA – current and savings account deposit).

Why the merger of PSU banks was necessary?

  • Starting from 1955, the government, despite the different names of banks, submerged all their differences into one common label called public sector bank.
  • These banks did not have major differences. This was not desirable as there was no competition in terms of urging in deposits and no competition in offering credit by offering interesting products.
  • These PSU banks were just happy to be just government-owned and for the government to take the responsibility.
  • Hence, the mega merger of PSU banks was indeed necessary.

How does the merger improve the performance metrics of banks?

Additional Capital

  • Performance metrics of these banks does not improve just by merging. The merger has to happen along with a package of other things such infusion of additional capital (after this mega merger, government announced 55000 crores rupees’ recapitalisation plan).

Bank Reforms

  • Other things affecting performance of banks are Reforms. Reforms has to go hand in hand and there is a whole set of reforms which has been in place since 2018 on which individual banks are measured and a public scorecard is disclosed to show how these banks have been fed.

Common unified messaging and performance reviews

  • The processes which are rolled out in one bank should go from the top to every employee in that bank. The consolidation makes sure that there is common unified messaging and performance reviews which extend across a much larger cohort.

Future of Merged Banks

  • Some people are complaining that after merging, the Credit Off take will be slowdown. However, that won’t be the case. For instance, during the merger of Dena bank, Vijaya bank and Bank of Baroda, the Credit Off take of Dena bank went down as it was under prompt corrective action (PCA). However, the Vijaya bank and Bank of Baroda were fully allowed to lend.
  • Hence, the merged banks may take time but the results will defiantly start showing.

Impact of Merger on Economy

  • The primary intermediation role of banks is to take savings from common people and make it available for investments.
  • For any economic growth to happen, credit (debt) or capital (equity) both matter. In the past, it was very hard to get for huge project as every bank felt that they did not have the ability to fund this project on their own in a significant way.
  • However, the merger not only allowed the bank to take up big projects but simultaneously allowed it to bring in best-in-class service for individuals.
  • For instance, after the SBI merger in 2017 to merge its five associate banks and Bharatiya Mahila Bank with itself, the kind of traction which the bank got in terms of people using mobile for payment instead of physical debit cards is a huge.

Concerning issues

  • Despite the merger of Dena Bank, Bank of Baroda and Vijaya Bank in April 2019, their lending rate have not been improved.
  • The recent merged banks have different levels of not just profitability but also in terms of their ability to handle difficult loans.
  • The critical thing, after merger, is to see how the management will be structured in these merged Banks. For instance, whether the seniority will be determinant for the position of CEO.
  • Lots of work have been assigned to the boards of the merged bank to create synergy between banks. Now, how does the board structure is created is very important for the markets and to get confidence that these banks really mean business.
  • Moreover, the presence of CEO in the public sector bank is of paramount importance as it creates impact on banking structure. Lot of bank’s capital is a human resource and how the CEO comes in, who will be CEO and what are his/her choices will be very critical.

Steps taken by government

  • The government has announced a series of steps including giving greater powers given to the board in order to drive decision-making process, to review it and to have oversight on it.
  • It has also provided for the provision to have a much stronger risk function within the bank to get in somebody from outside (employee) to get the best talent as a non-official director on the board.

Suggestion

  • The merged banks should focus on sector wise foreign markets. For instance, some banks might focus on specific products of European markets while some banks can focus on African market. Hence, it is a good idea to make foreign business policy right now.

Conclusion

  • The mega merger of banks is a good thing, however, it should have happened earlier.
  • Leadership in the merged banks is going to be absolutely vital to deliver the outcomes. Hence, the question from customer’s point of view is that whether the recent merger is just a conglomeration of bad banks or is it these banks have a synergy between them.
  • The merger process needs to make sure that benefits should reach to the ultimate retail customer while making sure that industry, which create jobs, does not get off credit.
  • In nutshell, the reforms in banks will continue to happen. Product innovation, continuous reform investments in technologies, better back-end processes and reducing turnaround time will continue to happen in banking sector.

 

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