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The quest for mega banks

The quest for mega banks
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First Published: Thu, Apr 05 2007. 12 21 AM IST
Updated: Thu, Apr 05 2007. 12 21 AM IST
Despite a lot of talk, there has been no progress in merging public-sector banks (PSBs). The reason is that neither banking theory nor procedures support mergers in the Indian banking system.
In 1991, the Narasimham committee had a suggested structure for the banking system. Three or four large banks (including the State Bank of India) could become international banks while another eight to 10 national banks with a network of branches throughout the country would be engaged in ‘universal’ banking. The Narasimham committee was of the view that the move towards this structure should be market- driven, based on profitability and built through mergers and acquisitions. The finance minister and the Reserve Bank of India (RBI), too, have often mentioned the need for banking mergers.
Let us see what is holding up progress on consolidation.
First, the link between banking size and efficiency is unclear. Data on the relationship between the size and certain performance parameters of banks in Europe, North America and Japan (as analysed by T.T. Ram Mohan of IIM Ahmedabad) show that the return on equity does not increase uniformly with size. In Europe, for example, banks with assets worth $5 and $20 billion are more profitable than those with assets in the $20-50 billion range.
Second, an overview of Indian banks also shows no correlation between their size and financial efficiency. With total assets of Rs5 lakh crore, SBI’s operating expense to asset ratio is 2.37%, whereas it is only 1.84% for Corporation Bank (with assets of Rs88,000 crore) and 1.64% for Oriental Bank of Commerce (assets of Rs58,000 crore). The comparative profitability ratios tell a similar story. SBI’s return on assets is 0.89% compared with 1.24% for Corporation Bank and 1.39% for Oriental Bank of Commerce.
Third, procedural hurdles discourage even planning of mergers between public-sector banks. Different laws and procedures are applicable for merger between different types of banks and their combinations.
Thus, the merger procedures would differ for: Merger of two listed nationalized banks; merger of two unlisted nationalized banks; merger of a listed nationalized bank with an unlisted nationalized bank; merger of a nationalized bank with a private bank; merger with SBI; and merger of two private banks. This is so mainly because each group of banks is governed by a different law. The procedures in a merger of two listed nationalized banks (now that 16 of the 19 are listed) would be as follows: The boards of directors of both banks have to approve the merger; this, in turn, would require a detailed analysis to establish gains from the merger; approval from the annual general meetings of both the banks; approval and clearances from Sebi; approval of the Union government which would necessarily require consultation with RBI; formulation of the scheme; publication of the merger scheme for comments of stakeholders; and the final publication of the scheme after comments.
Besides, one of the typical hurdles in the success of any proposed merger of two listed nationalized banks is that, at the beginning itself, a majority of the directors of the board would find it against their own interest to back a merger.
An analysis of the composition of the board of directors of a nationalized bank indicates that the two whole-time directors (the chairman and the executive director) and the two nominee directors of the government and RBI are the only directors who would be willing to support a merger proposal as envisaged by the government.
The other nine directors are unlikely to support a merger proposal simply because they would lose their status as directors on the merged identity unless they are suitably rehabilitated in some other bank by the government.
Fourth, fears of uncertainty among the employees regarding redundancies, promotions and postings post-merger, particularly in the case of public-sector banks, activate the trade unions as soon as the idea of a merger is known. The trade unions in turn activate the political parties they are usually affiliated with. Thus politics takes over in stalling any plan of mega merger as soon as it is discussed by the government or the management, even if economic and financial synergies are well established.
Finally, even if the top four nationalized banks (PNB, Canara, BOB, and BOI) are merged, their combined assets would only be equivalent to the total assets of SBI (the biggest in India) which, in turn, is roughly only one-tenth the size of the world’s biggest bank by assets.
So much in terms of the need of consolidation to meet international competition!
K.B.L. Mathur is former economic adviser (banking), Government of India. Comments are welcome at theirview@livemint.com
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First Published: Thu, Apr 05 2007. 12 21 AM IST
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