Context: The government announced the merger of 10 public sector banks into four entities. This would take the number of banks in the country from 27 in 2017 to 12. The efficiency gains from the mergers for large PSBs would be largely illusory in the absence of sound management with a vision for the future. The post-merger scale economies that large international banks seek to achieve with ruthless measures are not feasible in India.
Mains: Indian Economy
How to make the PSB merger smooth and efficient?
To smoothen the merger process, the following measures may be worth considering.
- It needs to be ensured that there is no leadership vacuum in the anchor banks. The technical skills needed for integration planning, transforming business support functions and value build-up have to be cultivated. There is a strong need to revamp Human Resources (HR) practices and culturally integrate the expanded workforce through sustained training initiatives. It is equally important that the top leadership comes from within the banks based on performance. The practice over the years of shuffling senior executives from one PSB to another has done more harm than good.
- There is a need to recruit professionals from the market in key areas of technology, HR and risk management, in all of which PSBs are grossly under-equipped. Such recruitments should obviously be at market pay, which is the norm in joint ventures promoted by PSBs such as SBI.
- PSBs should not be found wanting when it comes to recruitment and training of front-line staff. While there will be a rationalisation of headcount due to voluntary exits spurred by relocation and other compulsions, many staff members moved across their former banks may be less than suitable for the new roles. A buoyant exercise of recruitment and training is vital.
- The government should actively plan steps to offset a possible slow expansion in bank credit in the near term. There is a decelerating trend in loan approvals by PSBs, as brought out in the last RBI report on Trend and Progress of Banking. Loan melas and directed lending measures would not be the ideal solution. Instead, Non-Banking Financial Institutions (NBFCs), which have a better understanding of the market needs, need to be tapped to ensure better credit flow. In terms of size, NBFCs are about 15% of the combined balance sheet of all banks. They should be enabled to step in more actively to fill the gap in funding Small and Medium-sized Enterprises, which are facing real issues as regards credit availability. Credit Guarantee Fund Trust for Micro and Small Enterprises managed by SIDBI may be revamped to assist more NBFCs. Drawings by NBFCs constitute just 7% of the disbursements made so far, and smaller firms are not even aware of this option.
- The government should resolve the tangles in the ownership of the merging PSBs in insurance, asset management, and other ventures. Some ventures involve foreign partners, and some are market-listed. The anchor banks should be free to take the best course that would optimize the value of such investments.
- Lastly, the government should consider converting a few ‘weak’ PSBs outside the merger into regional banks. This was one of the recommendations of the Narasimham Committee. Banks such as Bank of Maharashtra and Punjab and Sind Bank that have spread manpower, network, and resources thin could be turned into vibrant regional institutions to serve agriculture, trade, and commerce.