The government has shown great optimism in going ahead with merging more PSBs. In the latest round — the third — 10 PSBs are to be merged into four large banks, which will reduce the total number of state-run banks in the country to 12. The idea is to create lenders of world standing to facilitate the achievement of the vision to make India a $5-trillion economy by 2025. The idea of consolidation of PSBs had emerged in 1991, when 90 per cent of the market share in banking was held by state-run banks. Narasimham Committee then recommended a three-tier banking structure to be achieved through merger of PSBs. The committee recommended a structure wherein there would be three large banks that would have international presence, about 8–10 national banks, and several regional banks. Several Asian countries, including Malaysia, had gone for merger of banks following the Asian financial crisis of 1997. But India then refrained from any such move and pushed private banks as the economy of the country remained buoyant in spite of all neighboring economies crashing.
In the current context, Finance Minister Nirmala Sitharaman has clearly stated that the decision to merge the respective banks has been taken with the synergies of the selected banks in mind. It is expected that these synergies will make the mergers quicker and smoother to accomplish and also make the services of the banks available to their customers seamlessly. The FM stated that much thought was applied to the selection of banks to be merged; their cultural compatibility was examined before the mergers were finalised. The question, though, is whether the consolidation of operations will really benefit the country or the banking sector even as the economies of scale appears to be the primary consideration. Fact is that state-run banks have fatter workforces, while the number of employees working with private banks is pared to the bare minimum. The fresh set of mergers is bound to make at least some employees with PSBs redundant. The government cannot turn a blind eye to the situation. Apart from this, the issue of the baggage that the various merged Banks are bound to carry with them to the common pool has to be dealt with. That baggage is the huge Non Performing Assets that have virtually bogged every Bank down.
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In recent times, industries across the board have started retrenching employees. Companies such as Reliance Jio, Cognizant, Maruti Suzuki, Mahindra and Mahindra and even Parle have issued the pink slip to employees by the hundreds, as the economy is slowing down. Bharat Sanchar Nigam Limited is witnessing issues with contractual workers as many of them have not been paid for several months now. Some have even gone on strike demanding that their payment dues be cleared. Such actions come on top of NSSO data on jobs indicating that unemployment was at historic levels. In such a bleak scenario, when demand has seen huge dip — one of the primary reasons for the poor performance of the automotive sector for instance — further job cuts, even if they come with attractive severance packages, are not desirable.
Today, the problem is not of creating jobs but rather enabling companies to retain their previous workforce and thus not retrench employees. The trouble with retrenchment across sectors would be that an increasing number of households will be placed in a precarious situation as reskilling of employees is still at a marginal level in the country. It will only help dampen demand. The government will not be able to say for sure whether the mergers can deliver expected benefits. It is particularly worrisome given that some banks have huge Non Performing Assets burden on them and are yet to completely emerge from the crisis despite infusion of funds by the government.
Those massive funds so infused are also tax payers’ precious money that is being squandered away over the years. If a relatively weak Bank is merged with one that is performing better, it need not always emerge stronger. The weakness of one Bank may infect the others and could render them weak as well. And if it is a larger entity that crashes, the impact could be immense. Also, there is little proof as of now as to whether the merger of the associate banks with the State Bank of India has actually delivered any benefit. Although the formal merger of associate banks with the SBI went through quickly, the lender’s task of fully integrating the merged Banks has taken longer. The task of honest and transparent data collection and the process associated with it in the government system has been fudged for far too long. That is definitely hampering the governance set up now. It will take considerable time for the Bank to realise economies of scale. SBI will undoubtedly find it a huge challenge to integrate their workforces with those of the merged entities. Pension and retirement benefits are expected to make a large dent on SBI’s profitability for several years.
There were also issues with the number of branches Banks have. In many places the sister Banks had branches close together. These had to be rationalised post-merger. With all such tasks associated with mergers, besides protests from organisations representing employees facing retrenchment, it would be a tightrope walk for the government until the objective of a better performing, stronger banking system is achieved. The prevailing economic conditions do not offer reasons for hope, particularly as certain reports predict a global recession in the coming year. It can only be hoped that the government’s latest gamble would pay rich dividends for the benefit of all citizens.
