India’s banks at inflection point as size, scalability matter a lot

The government during Covid-19 as a part of Atmanirbhar Bharat policy indicated a strategic Disinvestment policy that categorizes that public-sector banks (PSBs) as a part of strategic sector and states that the government will retain a bare minimum presence in this sector. Accordingly, the banks will be considered for privatisation, merger or closure.

This policy envisages to minimise the government presence in public sector enterprises across all sectors including banking. There was a clear roadmap for strategic and non strategic sectors. This was a stated policy of the government for disinvestment and at that time it was expected that the government intended to have four strategic public-sector banks and other public-sector banks were either for merger or for privatisation. However, since then only in respect of IDBI Bank, the sale of government and LIC stake is initiated and the process is still underway.

Recently there has been news that the government of India wishes to further amalgamation of public-sector banks. This is with reference to the government intention that to have a stronger and globally competitive bankss as India under the leadership of PM Narendra Modi wishes to make India a developed country and a Viksit Bharat by 2047.

To have the vision achieved along with other major action plans, banks in India must become much stronger and bigger in size and higher reach, strong in technology and specialised and knowledgeable staff who would be able to mobilize faster and higher savings as resources as well able to finance larger manufacturing and service projects, public and private infrastructure projects, alternative energy projects and new expansions in technology, data centre, AI related innovation and applications, etc. In this background, further consolidation and merger of public sector banks becomes imperative.

Earlier merger and amalgamation of SBI with its subsidiaries as well amongst public-sector banks thereby reducing the public sector banks to 12 as on present, was in the background of few banks were weak in view of large non performing assets, the need to infuse capital from the government to raise their capital adequacy as well improve the networth as few banks were also incurring losses

These merger earlier carried out as resulted in positive results as today these large size banks have been able to come out successfully from the large non performing assets to below one per cent as far as net non performing assets, with substantially higher capital adequacy ratio and ability to have high profits.

Currently the big 12 PSBs banks namely SBI, PNB, Canara Bank, Bank of Baroda, Union Bank of India, Indian Bank where merger took place are much stronger in all respects. Balance Banks like BOI, IOB, BOM, Central Bank of India, P& S Bank, UCO Bank are also stronger.

It is therefore envisaged that it is the apt time to envisage further consolidation and merger and amalgamation amongst these 12 PSBs as that would create further opportunities for stronger growth and with large size and scale these PSBs will be able to come to the expectation of the government to play a larger and bigger role in the journey towards Viksit Bharat.

Currently the domestic credit to the private sector by banks was 50.14 per cent of GDP in 2021, which is lower than world average. This ratio currently at lower level should go up substantially with further deep penetration which will outpace economic growth which is crucial for sustaining higher GDP growth. Recent time data indicates that the deposit growth in SCBs is not upto the expected level and whereas credit growth has also been slowed down.

As on RBI data, bank's credit growth at the end of October 31 stood at 11.3 per cent, while deposits grew 9.7%. If India has to register an average of 8% GDP growth in the coming years in the path to Viksit Bharat, the Bank’s ability to mop up surplus funds as deposits for further lending towards developmental economic activities should be strengthened and these two rates of deposit growth and credit growth have to go substantially.

The proposed plan of merger amongst PSBs should result in faster rate of growth in overall business, increased and enhanced market share of PSBs in total business, better utilisation and optimisation of the resources, infrastructure, technology, human resources etc should be aimed and achieved with productivity being high, efficiency and nimbleness as well better and fast decision making, turnaround time being improved at all levels.

With the size and strength, these bigger PSBs may provide and better equipped to face competitiveness at globally and support high value lending for India’s economic ambitions.

There is scope for more meaningful economic and financial inclusion in spite of great strides already achieved through the size and reach of these merged PSBs. The MSME sector has still has unmet credit demands and more innovatively and with digital platform and swift credit decision with the usage of ULI, frictionless Bank credit of RBI should be used to cover all micro and small MSMEs.

There are large number of central and state government initiatives towards further substantial growth in manufacturing, industrial corridor, PLI, global manufacturing hub, further push in manufacturing, industry 4.0, technology upgradation, better and efficient manufactured products for global and domestic market, the merged PSBs should take larger initiatives to contribute more in these initiatives and projects.

Recently FM Nirmala Sitharaman said the government is discussing with the banking Regulator as well banking sector representatives to develop large, world class Indian banks and work is underway for the consolidation of the state owned public sector banks.

FM said that “the centre has to sit with the lenders and see how they want to take this forward" She further added " we are also discussing with RBI on how they have idea of building larger banks.”

As FM has said while addressing at 12th SBI Banking and Economics Conclave in Mumbai on November 4th, there's a lot of work to do prior to my saying Yes, I have taken a call and in that work has already commenced. These comments came during the time when the news around consolidation of the state owned banks has already been in the horizon.

While earlier merger amongst few PSBs have gone well which we must appreciate the smooth process undertaken by the respective banks and achieved stability and ability for further growth, inspite of challenges on technologies front, human resources front, rationalisation of network etc.

It is therefore expected that lot of preparation and senior leadership role along with ground level acceptance and support is needed for further consideration and merger, this merger will take place after a while as FM said it needs discussion amongst Regulator, Government and concerned Banks before finalisation.

The mechanism for future public sector banks (PSB) mergers in India involves the government, led by a panel of Ministers known as the Alternative Mechanism (AM) giving in principle approval for consolidation. The AM overseas the process, which is guided by the RBI and aims to create larger, stronger banks. Following the AM's approval, the Central Government notifies the final merger scheme in consultation with the RBI.

This scheme of further consideration and merger amongst PSBs whenever announced, these are to be handled and executed with great care and with more precision as well keeping the interest of all stakeholders and customer centric with the objective of better service and delight.

The merger amongst PSBs should also be followed up by further empowering PSB Leadership, improved and strengthened Boards with diversity and knowledge, better working conditions and enhanced pay packages, an transperent performance management system and higher learning and development initiatives, AI empowered and emerging technologies investment to make the agile and efficient with better informed credit underwriting standards and higher risk management strength and overall customer engagemeent and relationship leading to customer delight, better profitability ratios and adding higher value proposition to stakeholders and equity valuation going much higher in view of intrinsic value of PSB's being higher and providing large dividends to government and other equity holders.

(The author is former Chairman & Managing Director of Indian Overseas Bank)