To address the issue of having and nurturing healthy PSBs, on August 23, 2017, after successful merger of five associate banks in State Bank of India, the Government is encouraging amalgamation of public sector banks to facilitate consolidation leading to a strong and competitive banking environment in the country. The consolidation would be solely based on commercial considerations, and would be initiated by the banks themselves.
Earlier, in 2009, Committee on Financial Sector Assessment (Chairman: Rakesh Mohan) had proposed that the RBI should create a conducive environment for mergers and amalgamations. The merger of PSBs into 3-4 very large and 8-10 large banks had been recommended even earlier by the Committee on Banking Sector Reforms (1998: Chairman: M. Narasimham). Along with the reforms in 1991, it was suggested that India should have fewer but stronger PSBs. Still earlier, restructuring of Indian banks through merger and acquisitions had also been recommended by other committees since 1972. Thus, issues related to consolidating Indian banking sector has been debated and discussed for many years and merger has been a preferred recommendation consistently.
Consequently, in India, many banks in the past were merged with other banks. Illustratively, New Bank of India and Punjab National Bank, both PSBs, were merged in 1993. Similarly, State Bank of Saurashtra and State Bank of Indore had merged with the SBI in 2008 and 2010, respectively. In this context, recent consolidation of SBI and all its sister concerns has to be viewed as a continuum of the same process. The newly cast and renewed SBI is now having a customer base of 37 crore, network of nearly 24,000 bank branches, nearly 60,000 ATMs, 6 lakh Point of Sale (POS) machines and over 50,000 business correspondents spread across the country. More than 8.6 lakh merchants are already on board on BHIM Aadhaar, Bharat QR (quick response code) and POS, increasing the digital banking footprint. In view of its size, it has been able to streamline its operations and is offering many of its loan products at lowest lending rates amongst banks operating in India, mainly because of economies of scale.
Consequently, SBI has been catapulted into the top 50 banking institutions in the world, in terms of assets. It is necessary, that while SBI competes with the very best banks of the world, in terms of size, business, and branch network, there is some competition to SBI from within the country, if monopolistic practices are to be contained. Further, consolidation is not just about size but also about efficiency and synergy as economies of scale make the bank more productive, profitable and competitive. There is sufficient evidence to show that large PSBs like SBI are more efficient and perform better than small PSBs. Hence, the need for consolidation of PSBs.
Theoretically, key reasons for merger are economies of scale and scope, revenue enhancement, value maximization, efficiency gains, cost savings, diversification of customers and assets, and also that large banks help in international recognition. However, mergers, in general, are a challenge and have to be carefully designed. Mergers can be successful in similar institutions with a similar culture like that of the SBI and its associates, but cannot be extensively adopted because it leads to job cuts, branch closures and in some cases, lowering of quality and quantity of services.
The banking in the next generation would be challenging as it would have to combine traditional brick and mortar branch network to technology driven products like mobile banking. The developments in the economy consequent to Jan Dhan Yojana, demonetization, implementation of GST would imply that vast majority of people and businesses, including MSMEs would need banking support. Thus, there would be extensive demand for banking from erstwhile informal sector which is very large, nearly 90 per cent of the economy. To meet such tsunami-like surge in demand, consolidation of banks into a few large, robust and efficient banks is a necessity. And efforts by the Central Government towards consolidation of banks are laudable as it is expected to facilitate growth and economic prosperity by providing financial resources at competitive rates to citizens across the country.
Prof. Charan Singh, Indian Institute of Management (IIM), Bangalore writes this piece for FICCI publication “Economy Watch”.
