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The Game Changer You Can Bank On!

Bank mergers are no mean task and require an enormous understanding and momentum to ensure that all cogs in the wheel fit seamlessly to ensure success.

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One of the most hotly debated topics in banking circles currently, is perhaps, the government’s announcement of the big bang merger in the PSU Bank (PSB) space and the infusion of a whopping Rs 55,250 crore as upfront capital into the PSBs. The amalgamation includes the merger of leading banking entities like Indian Bank with Allahabad Bank; The Oriental Bank of Commerce (OBC) and United Bank of India with Punjab National Bank (PNB); Canara Bank with Syndicate Bank; and Andhra Bank and Corporation Bank with The Union Bank of India. The merger itself is a bold step considering that 10 PSU banks are involved in a mammoth exercise comprising Rs 31,79,304 crore deposits, encompassing around 37,492 domestic branches and 45,448 ATMs, affecting as many as 3,08,732 bank employees.

The rationale behind these mergers has been clearly spelt out. It aims at creating larger banks so that they are more resilient to mitigating solvency problems in downturns. Additionally, these mergers are aimed at removing the disparity that exists between large and small banks, along with cost savings from network overlaps and compliances. Besides, it provides a larger middle-management base to select candidates for the post of DGMs, GMs and CGM. The merger will also facilitate better credit appraisal, risk management, human resource management and refurbish the information technology departments. In short, the mergers will enable efficiency in decision-making on high lending and restructuring with fewer banks in place.

The impact of these mergers run deeper than what meets the eye. These mergers impact deposit holders, shareholders, borrowers, employees and the public at large. The merger driver has already started exerting pressure on the stock price of PSBs as indicated in Table 2.  However, mergers are not new for our banking system. Indian PSBs have a history and experience of mergers including the consolidation of State Bank subsidiaries and Bharatiya Mahila Bank into SBI and the most recent merger of Dena Bank, Vijaya Bank into Bank of Baroda (BoB). In the past too, New Bank of India and Nedungadi Bank got merged into PNB and Global Trust Bank was merged into OBC under different circumstances. While any merger or consolidation does create apprehension amongst employees, shareholders and various other stakeholders connected with the organisation, the intense short-term pains can be mitigated with the prospects of long-term gains provided the merger process is seamlessly executed, within the firm but along with fine-tuned balancing of stakeholder interests. Moreover, the interest of bank employees unions of various affiliations must be protected and their competencies are brought together for the growth of the new entity. While it cannot be denied that SBI reported asset quality woes in the latest June quarter with it adding Rs 16,212 crore to its already large bad loan book of over Rs 1.6 lakh crore. And, BoB also reported stress on profits and asset quality in the last quarter after the merger. It has to be understood is that the benefits of consolidation are only achieved in the medium to long term as the stronger banks require significant time, effort and resources to turnaround the weaker balance-sheets. One of the biggest challenges going forward, would be the implementation of the roadmap for aligning HR and infrastructure such as branches, ATMs, products, etc. as well as the integration of information technology.

Integration is not an easy process and many issues have to be kept in mind while ensuring a smooth transition. Case in point is the technology used by different banks. While using Oracle’s core banking solutions (CBS), the versions used by Canara Bank and Syndicate Bank are different; Union Bank and Corporation Bank are working on Finacle 10 and Andhra Bank working on Finacle 7 bandwidth.

However, in the past, BoB was operating on Finacle 10 and Dena Bank on Finacle 7. Integrating two networks on different IT platforms into a common one is tougher than setting up a new bank as each bank has developed a unique system by engaging with different vendors, hence, creating an entity that can seamlessly cover all aspects of the banking business will take a long time. Another important consideration is reassessing the shortage or excess of land and buildings so that they can be optimally used or disposed off so that the unproductive assets are encashed. In locations of overlap of branches, decisions have to be taken to close them. Last but not least, the institutions with different work cultures and processes need to be brought on the same page. But overriding all this, the greatest challenge would be the emotional integration of employees from different cultures and the environment.

So all things considered, like technology, assets, liabilities and culture, what are the chances of the success of these mergers? The success will eventually depend on the ability to manage its aftermath with changes. Using the merger as a standalone initiative without enough reinforcements will weaken the purpose of the merger resulting in inefficiency.

The synergy of bold bank reforms will have to be fully operational to infuse renewed optimism among PSBs. This will largely depend on the leadership steering the process considering the mammoth challenges. Be it handling resource integration, information technology platform integration, regulatory compliances, or managing the demands of the Union, incentivising the employees and the crucial task at hand of customer retention. One of the mainstays of post-merger success would be developing niche products, rebranding and repositioning. The succession planning to continue the efforts in the present economic slowdown, the other challenge would be credit growth and control on NPAs with the government providing the required impetus from time to time.

To sum it up, bank mergers are no mean task and require an enormous understanding and momentum to ensure that all cogs in the wheel fit seamlessly to ensure success.  

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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S Ravi

The author is a practising Chartered Accountant and Independent Director of Public Companies

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