Impact of mergers in Indian Banking

Riyaz Ahmed Bhat
The merger of five regional banks with State Bank of India and merger of two Public Sector Banks (PSBs) Dena and Vijaya with Bank of Baroda in recent past is an indication of direction of the wind is going to blow for Indian banking industry. By this the Govt has set tone for consolidation in PSBs with its vision for creating big banks to compete with international banking corporations. This policy of consolidation is in line with reformist agenda pursued by Govt of India (GOI) since 1990. It is to be noted that in recent elections the two contesting political formations had declared their identical vision on Indian banking sector in their election manifestoes hence it will be wrong to assume that any drastic change is to happen in near future with a change in political executive. The studying of this vision reveals that the GOI visualizes the creation of three tier of banking system in India consisting of two to three international level banks, five to six national level banks while leaving rural and small town banking to 20 to 30 state level rural banks in domain of cooperative or regional rural sector. To achieve this goal the GOI has initiated the consolidation of PSBs beginning with merger of smaller PSBs in bigger entities. These entities are to receive recapitalization funds from GOI to boost their networth strengthening their capital base. This step is expected to be followed by amalgamation of midsized PSBs to create entities of second level to cater to national need shedding the regional outlook .During this phase the big private sector banks(PvtSBs) are expected to prey on smaller private sector banks so as to add to their size and business by acquisitions and mergers. The small PvtSBs will be hunted by offer of good prices to promoters as hunters have no dearth of funds for this purpose. In this environment a small window will be available for these smaller banks to retain their partial identity by amalgamating with other players in this arena having compatibility in their business models, working IT platforms and beneficial geographical presence complimenting each other after amalgamation. The Reserve Bank of India(RBI) vide its master regulations issued in 2016 has declared its commitment to protect the interest of depositors in a banking entity endangered by depleting capital base following continuous loss making. This intervention by RBI is expected after it observes that its restrictions like Prompt Corrective Action Framework (PCAF) could not improve the position of that bank or promoters are unable to infuse required capital to improve its capital adequacy ratio.
The mergers, as explained by its votaries, are the solution to requirements of a weak bank by a strong bank addressing its capital needs without disrupting its business operations. Further it is argued that it results in cutting down the administrative expenses providing efficiency to working. This is by adding to customer base to new entity without incurring operative costs. However opponents of the mergers advocate that to meet any capital need of a small bank is always easy while as recapitalization of big banking entity requires big funding which most of times proved very difficult. They further argue that failures in banking have remained inevitable hence it would be better to have a limited impact by failure of a small bank rather than a catastrophic effect on country’s economy by failure of big bank. The subprime crisis of 2008 is a big example the affect of which was felt across the globe.
After studying the banking structure of a small state of J&K it is felt that mostly banking facilities are provided by state Govt owned J&K bank, cooperative banks and partly owned regional rural banks while as national level PSBs or Pvt.SBs have a minimum presence only poaching on deposit base provided by savings of state subjects. Though State Govt. owned J&K bank has been classified as an old PvtSB yet it discharges its duties as agent of RBI for state Govt besides having lead bank responsibilities in state. For a pretty long time various PSBs and PvtSBs have been eyeing for J&K Bank Because of its considerable presence in J&K and other adjoining north Indian states alongwith metros. These efforts continue through offers of its acquisition through amalgamation or through merger but so far the J&K Govt has resisted the temptations of good pricing for its stake by these players. The J&K Govt is aware about the feelings of state subjects who are bound to feel the loss of the brand J&K emotionally as well as strategically. Because this bank alongwith other state owned cooperative banks has been major contributor in implementing state Govt. initiatives for development of state because most of PSBs and Pvtsbs have been often showing cold shoulder to J&K Govt programmes. Also state subjects feel that the loss of this will result in loss of employment opportunities because bank has been second highest employer of state subjects.
The Govt has so far initiated certain measures to reform the governance of various owned financial institutions but a lot still needs to be done. In this direction creating a structure on lines of Banks Board Bureau is need of the hour. This will not only help in bringing in professionalism in boards of these institutions but also insulate these institutions from undue interference. Besides as per RBI policy guidelines the Govt can consider amalgamation of cooperative banks into a single state level cooperative entity alongwith consolidation of RRBs into a state level rural credit delivery vehicle under sponsorship of JK Bank. It will be in fitness of things to reiterate that continuing with regional character of J&K bank with a national presence and the Govt having stake of more than 50 percent makes sense which will be also in interests of the state of J&K.
(The author is Secretary General Jammu and Kashmir Bank Officers Forum)