A smart gang of three

Finally, the public sector banking industry seems to have found a way to blunt the political opposition to consolidation. The Mangalore-based Corporation Bank has informed the stock exchanges that the chiefs of three banks""namely the Oriental Bank of Commerce in Delhi, Indian Bank in Chennai and Corporation Bank itself""are planning to sign a memorandum of understanding (MoU) for a strategic business alliance. It is a smart move that deals with the political reality of the Left parties being unwilling to allow bank mergers, even though the finance ministry has been pushing for it. In order to survive and flourish in a market-driven economy, banks must have scale. Unfortunately, not a single Indian commercial bank has global scale. Only the State Bank of India features among the world's top 100 banks, that too at the 93rd spot in terms of Tier 1 capital, and 84th in terms of assets. The SBI is India's largest commercial bank, accounting for a fifth of the entire banking industry. The second-largest banking entity, ICICI Bank, is ranked 204th on the basis of capital and 217th on the basis of assets. On the Asian turf, the SBI is the only Indian bank among the top 25 players in terms of size. In contrast, the top four Chinese banks are also Asia's top four banks and China's top two are among the top 25 global banks. The comparison is relevant, since India and China are the world's two fastest-growing economies and the rising giants of Asia.

The first serious move to attain scale in banking was seen two years ago, when two Mumbai-based public sector banks, the Bank of India and Union Bank, chalked out a blueprint for merger. The meticulously drawn-out plan had minute details, from relocation of branches to redeployment of people, and even the new name and logo of the merged entity. Both the banking regulator and the government were in favour of the merger but it was sabotaged by stiff resistance from the Left, which always sees the ghost of job losses in every such move. Alliances are the right answer to such opposition and, if done effectively, will define the new order in banking space; for without merging and diluting their independent identities, banks can leverage their combined balance sheet strength to garner new business and achieve new efficiencies.

This is so for fee-based businesses too. Banks do join hands when it comes to loan consortia, but they do not pitch for fee-based businesses in groups. For instance, the smaller banks can never get a pie of Indian Oil's foreign exchange business. Alliances will also help them make the best use of infrastructure (ATMs and branches), technology and people. And a collaborative approach will give them bargaining power when it comes to pricing loans. If the three banks plan an exchange programme for employees in their pockets of strength (like cash management by the Corporation Bank and bad loan recovery by the Indian Bank), they can get better training and exposure to best practices. In sum, this formula should be a recipe of success, if handled properly. At an appropriate time, the three entities can tie the knot. Couples do live in before solemnising their marriage with the blessings of parents and neighbours. In the case of banks, the parents (read the finance ministry and the RBI) are not opposed to the marriage but the neighbours (the Left parties) are. The question is for how long.