PSU Bank Mergers

The challenge will be in handling the softer aspects…

The cabinet finally approved the plan to merge PSU banks. With gross NPAs of the PSU banks at over 12.5%, there was little else that could have been done. However, there are a few key things to know about the next steps in the PSU bank merger plan.…

First a Group of Ministers… 

While the Cabinet has given the in-principle approval, now starts the tougher part of the game. To begin with, the prime minister will appoint a Group of Ministers (GOM) who will oversee and drive the entire process. Obviously, this GOM will have representatives from the finance ministry, regulators and from the respective sectoral ministries so that it becomes a comprehensive and a dispassionate process. The GOM will rely on the presentations made by the respective PSU banks.

That is where the situation could get slightly tricky. The government has already drawn out the broad outline of the PSU bank merger plan and SBI will be the template. While there will be national banks, there will also be strong regional banks that will develop expertise in a particular geography. Entirely relying on the banks to come up with ideas is not going to work. To an extent, the solution will have to be pushed down the PSU banks after gaining their broad acceptability. That could be the big challenge for the GOM!

There is logic in mergers… 

It is believed, and rightly so, that there is an eminent logic in forcing PSU bank mergers. There is tremendous duplication of branch networks and also of activities that can be shared. These costs can be sharply reduced through mergers. Additionally, each bank runs its own treasury which tends to be sub-optimal in most cases. This merger of PSU banks will result in larger treasury desks and will give greater bargaining power to banks in the bond markets. SBI is a classic example of treasury clout. Above all, this will give them the necessary balance sheet size to grow.

Softer challengers will dominate…

While there will be challenges on rationalization, costs and revenues, the real challenge will be on the softer aspects. Firstly, for PSU bank mergers to be meaningful there will have to be a real rationalizing of costs including manpower costs. That is a delicate issue especially with strong bank unions and the forthcoming general elections in 2019. Secondly, even though the merger may be between PSU banks, there is always going to be a culture mismatch risk. That is again a delicate issue to handle. But the biggest challenge will be equipping these banks with the wherewithal to sustain in a new age of banking that is driven by technology. For now focus shifts to the prime minister and the GOM! ©

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: