Bank salvation does not lie in mergers

Bank salvation does not lie in mergers

Reports say that the government is considering merging four public sector banks (PSBs), Bank of Baroda, IDBI Bank, Oriental Bank and Central Bank, which together lost over Rs. 21,500 crore last fiscal, to form another mega bank like SBI. The idea needs to be nipped in the bud. Indiscriminate merger of troubled PSBs would make no sense, and very likely worsen operations at the relatively better banks. The diseconomies of scale in bank mergers would be huge and synergy, hard to find.

Simply having common information technology systems would be quite a task, let alone establishing a common culture. The world over, the economic rationale for mega banks is increasingly suspect given compliance issues, operational complexity and the huge capital requirements. There has been only one instance of merger of two PSBs, the takeover of New Bank of India by Punjab National Bank back in 1993, and it was not a happy one. As Prof T T Ram Mohan of IIM-Ahmedabad puts it, two dogs do not make a tiger. Besides, the fact remains that the expectation of government support hugely reduces the incentive to monitor the behaviour of big banks, which, in turn, would encourage excessive leverage and risk-taking.

In any case, PSBs need to strengthen their organisational structure, tighten risk management and improve credit delivery, all critical for turnaround. Banks themselves need to proactively adopt Artificial Intelligence and machine learning to meet increasing customer demands and take on the threat from fintech and disruptive digital banking. The bottom line is that to address pressing problems like low credit growth, deteriorating asset quality and poor profitability of PSBs, merger is just not the way ahead. It might not even qualify as treating the symptoms instead of the underlying disease.