Merger of PSBs: Move to improve efficiency, bargaining power, says industry

However, benefits from these measure, being structural in nature, will accrue in the long term, they said.

The government’s decision on four sets of mergers of public-sector banks (PSBs) will expand scale of operations, improve efficiency, and enhance competitive higher bargaining power, according to rating agencies and the industry.

However, benefits from these measure, being structural in nature, will accrue in the long term. Effective integration, corporate governance, and skilfully managing human resources have a greater bearing on outcomes, they added.

State Bank of India Chairman Rajnish Kumar said the announcements were a clear recognition that bigger banks had a greater ability to absorb shocks. It will help them reap economies of scale as well as raise the capacity to raise resources without depending unduly on the exchequer, he added.

Srikanth Vadlamani, vice-president, Financial Institutions Group, Moody's Investors Service, said consolidating PSBs would improve scale of operations. But there will not be any immediate improvement in their credit metrics because all of them have relatively weak solvency profiles.

It will help improve their competitive position in segments where their share of customer wallet tends to be low, he said.

Prakash Agarwal, head, Financial Institution, India Ratings and Research (Fitch Group), said: “Bank consolidation is a good move. The steps to improve corporate governance and grooming leadership, if followed through with the right intent, resources and commitment, can go a long way in addressing the challenges that PSBs are facing.”

Sandip Somany, president, Federation of Indian Chambers of Commerce and Industry, said this would enhance lending capacity, and enable deploying better technology, a larger branch network, and an enhanced national and global presence. 

Anil Gupta, vice-president and sector head, ICRA, said recent precedents showed the amalgamation process took up to six months and the management bandwidth of the merging banks might get occupied amid this process. The choking of management bandwidth should not result in a slowdown in credit flow.

Of the five banks under prompt corrective action (PCA), capital has been announced for three banks, i.e. Indian Overseas Bank, Central Bank of India, and UCO bank. Capital infusion is unlikely to be sufficient for taking these banks out of PCA in the immediate future, he added. 

P S Jayakumar, managing director and chief executive officer of Bank of Baroda, pointed out “the combined institutions will be better than the earlier ones, a sum of the whole. The acceptance for what is best for the breed and the employees, regardless of where the idea came from, is critical. The employees of the larger institutions, treating the other as equal, is very critical.”

Rashesh Shah, chairman and chief executive, Edelweiss Financial Services, said consolidation in the banking sector would create higher efficiencies through better utilisation of capital, higher profitability, greater credit disbursal, and focused customer service. Autonomy to banks will help them take efficient commercial decisions, improve risk management and governance, strengthen balance sheets, and enhance valuations.

Niranjan Hiranandani, senior vice-president, Association of Chambers of Commerce, said bank mergers and reforms showed the government’s resolve to revive sentiment.