The largest rewrite of the banking history and merger's cultural traps

Govt's focus on technological compatibility over cultural is set to make the largest rewrite of the banking history a complex job

In a remote corner of Moradabad in Uttar Pradesh, the first rural bank of India has recently changed its nameplate. The changes at Prathama Bank, which literally means First Bank, also carries the signature of some of the large scale changes in the Indian banking sector. 

On August 30, Finance Minister Nirmala Sitharaman announced the merger of 10 of India’s state-owned banks into four groups. Taking into account another merger made in September last year, the number of banks has come down to 12 from 20 after the minister’s announcements. 

The headlines in Delhi were about the big-ticket changes. The changes in Prathama Bank were far more localised. This bank was established by Syndicate Bank on 2 October 1975 as India’s first regional rural bank. Just a week before, the Indira Gandhi-led government in New Delhi had issued the Regional Rural Bank Ordinance, 1975, on 26 September. The ordinance was later replaced by the Regional Rural Bank Act of 1976. It was unusual that a state-owned bank with headquarters in Manipal, Karnataka, should establish India’s first regional bank — that, too, so far up in the North. But then Syndicate Bank was doing some unusual stuff in the late 1960s, like setting up its first branch in North India in India’s first super market, Super Bazaar, built by the government of India in erstwhile Connaught Place, now Rajiv Chowk. The market needed a bank for the traders to do their business. In fact, it beat the big bank of North India, Punjab National Bank to it.

Nearly 50 years later the tide has turned. As capital became scarce in the banking industry due to the spate of bad loans, the rural bank was merged with another UP-based rural bank, Sarva UP Gramin Bank, from April 1 this year, and its parentage changed to Punjab National Bank. 

Anil Kumar Sharma, chairman of Prathama Bank, says the merger has improved their capital adequacy ratio to 12 per cent. This means the bank can serve an annual business turnover of Rs 32,000 crore. The rural bank’s shareholding of 35 per cent held by Syndicate Bank now goes to Punjab National Bank. The rest 65 per cent is shared by the Centre and the Uttar Pradesh government as is the norm for all the 45 such regional rural banks in India. With Punjab National Bank, too, caught up in the waves of mergers, Prathama’s signboard could change again. 

Beyond the signboards, what matters more for the farmers and other rural people in the four districts of Moradabad, Rampur, Amroha and Sambhal, where the rural bank operates with a network of 413 branches and 60 ATMs, is the disruption in their banking habits. While announcing the mergers in New Delhi, the finance minister had made it clear that the key consideration for her ministry was to ensure seamless merger without hurting customers. This is the reason why the single most important factor in deciding bank merger is the similarity of the technology platform. It is easy to see why this is so. For instance, so long as Prathama Bank was on Syndicate Bank’s platform, the bank’s back-end was on I-flex platform. When it moved to Punjab National Bank, the IT system had to be changed to Finacle. Sharma says for 10 days from August 22, the bank had to work hard to make the transition. In the process, it had to halt customer service fully for the first four days and then partially for a few days after that. 

“We have now been able to restore most of the front-end services and have sent out new ATM cards to replace the older ones with customers”, he said. 

In tune with India’s changing banking habits — more customers from rural areas bank with the universal banks than with the rural banks— technology is going to become ever more crucial in banking. All rural banks are subsidiaries of the scheduled commercial banks — the large banks. In towns like Moradabad or a little further up the highway in Firozabad, rural banks have become an oddity. In Moradabad, the branches of Axis Bank, SBI and Yes Bank are just blocks away from the headquarters of Prathama, which has made upgrades to its technology to compete with the big banks. Its high-speed mobile networks have changed the banking landscape in the region. Payments to workers in many of the 300-odd glass factories of Firozabad have begun to be made through digital accounts. Technology, therefore, has played a big role in ensuring a seamless merger. 

Even so, the proposed merger plan is sure to draw groans from bank employees and their old-time loyal customers who have to recognise the new reality of a merged, more tech-savvy bank, with possibly a different culture. Former chairman of Canara Bank, RK Dubey, feels the cultural disconnect is a real problem. 

“I have been through three mergers and the challenges were all from the point of view of the people”, he says. Dubey was a Punjab National Bank officer through most of his career. The worst of the mergers, he says, was the one between Punjab National Bank and New Bank of India, which created a lot of ill will among employees. It seeped into customer relationships as well. 

“It was a period before technology came into banks, and it was essential to make the two teams work together to make the operations smooth,” he says. It didn’t matter that both the banks were roughly from the same region, albeit with Punjab National Bank a far larger entity. 

Compared to the level of problems faced there, Punjab National Bank was able to make the absorption of Kerala-based Nedungadi Bank in 2003 or Kanpur-based Hindustan Commercial Bank in 1986 a relatively smooth affair. “There were massive differences in the language skills of the two sets of people in the Nedungadi bank mergers but it didn’t become a problem,” he adds. 

The merger story of each bank is going to be different. For Syndicate Bank, it is like going back in time in a way. The bank was known as Canara Industrial and Banking Syndicate Limited till 1964, when it got its present name. It could now become Canara Bank once again. Dubey feels this is one merger that should be seamless, since both the banks emerged from the same nursery of South Karnataka.

At Kolkata- headquartered Allahabad Bank, en-route to a marriage with Indian Bank, there is a sense of disbelief among employees.  Allahabad Bank has been roiled by bad news for the last few years, including an alleged loan fraud of Rs 1,775 crore by Bhushan Power and Steel. Yet the merger is being seen as disruptive. Like all other state-owned banks, Allahabad Bank also has branches in Southern India, but compared to its all-India network, they are less than 6 per cent. About a third of its branches are in Uttar Pradesh. But the entity it is going to be merged with, Indian Bank, is predominantly based in South India.

This should create synergy, but in the closeted world of Indian banking, this does call for a cultural adjustment. Speaking at a television programme, Pankaj Jain, additional secretary, department of financial services in the finance ministry, said there were six banks on the Finacle platform. Instead of merging all of them together as “it would have created disruption”, they were bunched into two groups. The tie breaker used was the geographical spread of the banks and to what extent they were compatible on capital availability, he added. But this logic cuts no ice with the bank’s employees. 

Ashwani Rana, general secretary, Delhi Pradesh Bank Worker’s Organisation, is sure there will be problems. “Bank mergers will block promotion prospects of employees and hurt their service conditions,” he claims. The unions are contemplating a strike soon to mark their protests. 

But there are a few commonalities between these banks as well.   Since the state-owned banks exchange their executive directors and chairmen regularly, there is a lot of synergy at the management level, says Gurnam Singh, former general manager of State Bank of India. Also there is synergy in terms of products as most banks have a similar offering. But this may not be enough to ensure a smooth passage to the merger deals. The course of the largest ever rewrite of the banking history in India since their nationalisation in 1969 is going to depend on how the staff takes to the changes.