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Merger Miasma

Merger Miasma

The government has found a quick-fix solution for our ailing banking sector – a mega merger  mela! It is akin to making a big omelette with one fresh egg and one or two rotten eggs. The cook beats all the eggs together, thinking that the end product will be fine. He uses all kinds of masalas, onions, tomatoes and even veggies. 

However, despite all the ingredients, the special omelette tastes horrible because of the egg quality. After all, one good egg cannot subdue the taste of a rotten one. Not only this, one who eats it falls sick. The bad eggs, actually, spoiled the edible one.

This is the new merger-recipe for most of our ailing public sector banks. In some cases, our finance minister Nirmala Sitharaman has also included all rotten eggs together. How? You will know as you read this further.

After this grand event, India will have only 12 public-sector banks from the earlier 27! That is the size of bank mergers. Unfortunately, the rationale behind these mergers is not to restore their financial health but to make them “global-sized” banks (read problems).

This is not the first time banks were merged. Prior to this, the government merged five associate banks of the State Bank of India, Bhartiya Mahila Bank and the State Bank of India in 2017. Thereafter, Dena Bank and Vijaya Bank were merged into Bank of Baroda in 2018. 

The question is: did these mergers do any good, either to the public or to the banks themselves. Were these mergers even studied properly before announcing further mergers?

If we consider the Bank of Baroda merger, Vijaya Bank had the lowest bad loan rate i.e., 6.2 per cent before the merger while Dena bank had 22.7 per cent and Bank of Baroda (BoB) 12.5 per cent. Post-merger, the consolidated bad loan rate comes to 12.4 per cent.

The first quarter results after the merger show the signs of a stressed asset quality, an immediate outcome of a merger with a weak and under-capitalised Dena Bank. Although the bank registered a profit in quarter one, it could not even come close to the estimated figures. On the contrary, it had a huge slippage of Rs. 5583 crore in June 2019, a major one from a leading corporate.

Similarly, the State Bank of India’s (SBI) asset quality woes accentuated after merger with its associate banks. In June 2019 quarter, the bank added another Rs. 16212 crore to its bad loan book of over Rs. 1.6 lakh crore.

The government’s argument that the merged entities will give the much-needed boost to lending does not hold well if we take the case of SBI and BoB as pilot projects. While BoB registered an increase of 6 per cent, SBI could increase its business by a mere 12 per cent, which is certainly disappointing, considering the huge size it has.

The proposed mergers can worsen the situation, considering the fact that the banks have a much weaker balance sheets compared to BoB or SBI. Worse, most of the banks would soon lose their existing leaders as they are on the verge of retirement.

Let’s take up the case of Punjab National Bank’s merger with Oriental Bank of Commerce (OBC) and United Bank. It is touted to be the second largest bank after SBI, considering the huge balance sheet of PNB. But the basket has got all rotten eggs together. The existing gross non-performing assets (GNPA) of PNB stood at 16.5 per cent as on June 2019. OBC and United Bank collectively have a GNPA of 13 to 16 per cent. 

In other words, unlike BoB merger, where two banks had comparatively low GNPA than the third, the PNB merger has no such advantage. Interestingly, the government is infusing Rs.16000 crore into this entity, the highest amongst all. However, considering their financial state, it seems, this money would not be enough. The bank may need more support to go forward.

The second merger – Union Bank of India, Andhra Bank and Corporation bank – has a similar GNPA of 15 to 16 per cent. All the three banks incurred losses in the March quarter. Again, Rs. 11500 crore as capital induction may not be enough for the merged entity.

The merger of Canara bank and Syndicate bank seems to be slightly better as the former has a relatively lower GNPA of 8.7 per cent, as compared to Syndicate bank. Similarly, Indian Bank’s merger with Allahabad Bank offers some comfort as the former has relatively stronger financial metrics and capital base. Indian Bank is the only bank that has not received any capital from the Centre since 2015.

Now the question is, how does creating a new bank with a bad loan ratio of over 16 per cent help anyone? The entire merger process sweeps the bad state of affairs of a particular bank under the carpet. So, the government has fewer problems to publicly deal with! Of course, the enormity would be much higher.

Some people argue that merger allows weak banks to sell assets, reduce overheads and close down money-losing businesses. This argument is naive, to say the least. This writer is unable to recall any business that the government closed down, just because it is making losses.

One of the examples is Hindustan Photo Films. The company was declared sick in 1996. It was only in 2016 that the high court accepted the recommendation of the Board for Industrial and Financial Reconstruction (BIFR) to wind up the company. 

Can anyone imagine the kind of loss the company incurred? It lost Rs. 11.65 crore per employee before the winding up started. Interestingly, it had only 216 employees on its rolls and a capital of Rs. 20.68 lakh! This is exactly the approach of the government when it comes to banks as well.

The grand procedure will certainly make strong banks weak. The overall bad-loan ratio of the SBI has shot up after the merger. As of March 2017, the bad loan ratio was 6.9 per cent against the current 10.9 per cent. This happened because the government does the match-making. What if a private bank were in SBI’s place? The management of the bank would have struck a deal while deciding mergers. They would have actually thought of profit instead of loss or absorbing a weaker bank into its structure.

Merger of Kotak Bank into ING Vysya is a case in point. When the merger was announced, many felt that it was a great deal. And Uday Kotak had got the bank at a much cheaper rate. In a candid interview with a leading daily, Dipak Gupta, Joint Managing Director, Kotak Mahindra Bank, had actually revealed that the merger had come with its own set of lessons.

At the time of the merger, “we did an estimate of what we are buying into.” However, the figures went wrong after the merger as Kotak had a huge pension bill of Rs. 300 crore in the first quarter itself. The workforce had increased with people coming from different cultures. It was a big challenge to keep them together. This was further mounted by the difficulties they had managing the customers. The technology integration itself took a lot of time. The entire process took more than two years to smoothen up. Even after three years of merger, the management had been continuously reviewing their decision on a quarterly basis.

If a private business owner faced such difficulties, how would a blanket merger like this be? It certainly would have much more complexities, considering the leadership issues, cultural issues and, of course, managing the customer base. If the merged banks have to keep the employee base intact as claimed by the finance minister, it would be equally difficult and taxing.

Even now, BoB is having issues with branch rationalisation. A recent article says that the bank has 1400 locations, where there is more than one branch of the merged entity. In case, those branches are closed or shifted, even then there would be a case of employee retrenchment or relocation.

In a recently published report, Credit Suisse, the international credit-rating agency, has mentioned that the bank mergers will not be able to revive the credit growth, considering the growth in private sector banks and slowdown in the economy.

If this is the case, then why this  Dabang-style approach to the banks, indicating all problems will be wiped off with one stroke. The government has clearly not learnt a simple lesson that when one sees a problem, it needs to be resolved immediately. It should not be mixed with other problems to create a bigger problem. 

Also, the GDP growth rate is already at a six-year low. The country is already sailing through troubled waters. Tinkering with the banking sector at this point of time may worsen the situation. Hope the government reviews its decision for the greater good of the society.

(The writer, a company secretary, can be reached at

   (Published on 09th September 2019, Volume XXXI, Issue 37)