A bitter pill that can’t be avoided

[dropcap]T[/dropcap]he second batch of bank mergers, involving Bank of Baroda, Vijaya Bank and Dena Bank, has advanced to the next stage of formalisation, with the three banks sending detailed proposals to the government for approval. Last month, the boards of the three banks had given in-principle approval to the merger, which will create the country’s third biggest bank with a combined business of Rs14.82 lakh crores. The ones ahead are State Bank of India and the ICICI Bank. Last year, SBI had merged itself with five of its subsidiary banks, also taking over Bharatiya Mahila Bank, catapulting it to be among top 50 global lenders. But the latest round is the first instance of a three-way amalgamation as the one involving SBI was between the principal and the subsidiaries.

India’s banking sector has been desperately in need of reforms as the multiplicity of banks with their inefficiencies and the resultant build-up of toxic assets have created a nightmare for the government, which is the majority owner, as well as the regulators. While it is true that the amalgamation of two or more inefficient banks does not necessarily make an efficient new entity, there is a certain minimum size that makes a bank ‘too big to fail’. This is the idea behind bank mergers and is in pursuance of a policy of banking sector consolidation. Currently, there are 21 public sector banks, which the government wants to reduce to between 10 and 15 and that would be a more manageable number, while it adds to the size of each player. After the current round of mergers, there will still be 19 public sector banks, which means there is scope for many more mergers to achieve the desired number.

The consolidation is to be carried out keeping in view factors like regional balance, geographical reach, financial burden and smooth human resource transition, the last one being a particularly sensitive area. As was expected, the bank unions have raised an alarm over possible job redundancies, but viewed against the larger objectives, such sacrifices are certainly worth making. Bank employees, of course, would like to believe that the banks have been set up primarily to serve their interests, a concept that often drives the approach of the unions, but that does not count much in the changing business landscape. The unions will gradually learn to live by the new realities.

Of course, bank mergers, a stable component of the banking reform process, imply a huge political step as it involves to an extent the reversal of the celebrated policy of bank nationalisation. The new thinking is in favour of the government giving away ownership rather than acquiring more. The move will have its own political risks, which is the case with all radical initiatives at all times.