Sunday, April 6, 2008

Banking on mergers

PSU banks should emerge stronger in terms of their reach

In the recent past the board of HDFC Bank and Centurion Bank of Punjab decided to merge and form what is touted as the third largest bank in the Indian banking sector after SBI and ICICI. Mergers are nothing new in this globalised era but any merger in the banking sector creates more ripples and news than probably it would have created for any other sector. Reason? The archaic Licence Raj type stranglehold that RBI still continues to have on the Indian banking industry. Reminiscent of the licence era, bankers even today would have to queue up outside the offices of RBI officials in their quest to get permission to open a few more branches. And for this they have to literally beg at times while the RBI would continue with its know-all demeanour and not let it happen for reasons best known to them. Incidentally, in a country where more than half the population still don’t have access to banking and perennially remain at the mercy of the moneylenders who continue to charge interest at rates which could have pauperised many of our billionaires even. Incidentally there are many places adjacent to cities in this country today where thanks to real estate boom and expansion spree of the cities, one can find literally any car model, any mobile model or probably just about every consumer durable product but what one would not find is a PSU bank. Even today many such places would have to depend on the ubiquitous lone branch of any public sector bank which would continue to function in the most archaic manner.

A merger is all about increasing the reach of the banks while consolidating its financial strength through a stronger balance sheet, thus reducing its chances of collapsing while increasing its ability to take more risk in terms of lending. Typically for a long period of time, thanks to the era of stranglehold of licence raj, the banks never essentially performed the function of a banker, i.e. to identify a good business proposition, lend money and see it through the stage of incubation to blossoming stage thus creating entities which could solve the problems of unemployment and unavailability of quality good and services. The need of the day is not too many banks but on the contrary few but strong and visionary banks. What’s the point in having 27 public sector banks each fighting with each other (at a time when competition from foreign banks is only increasing) and yet the society remaining perennially under banked? Most of the public sector banks should be merged with each other to create strong banking entities.

India’s largest bank, State Bank of India, is ranked 107 by the The Banker in terms of the largest banks of the world while China’s largest bank is 11th in the same list. The archetypical public sector bank unions and their employees have been resisting the mergers, but it is important to decide as to what is more important today, the cosy 10 to 5 job of a risk averse, public sector banker or stronger banks with better reach so that the marginal farmers need not take money from moneylenders and continue to commit suicide? If it is the second, then we need more of HDFC-CBOP type mergers – this time in the public sector paradigm.


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