Banking on the PSB mega-merger PDF Print E-mail
Friday, 06 March 2020 00:00
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Shobhana edit 

Given how consolidation in the public sector banking space has been contemplated for decades, it is commendable the Cabinet has approved the merger of ten lenders into four. The unions can be expected to try and stall the process, but the government must hold its ground. The merger of Dena Bank and Vijaya Bank with Bank of Baroda is coming along nicely, evidence that the problems are not really insurmountable. More important, the government must introduce the many operational changes proposed so that the boards of the lenders, as also the managements, are empowered. Many of the problems of the past are the result of the managements being hamstrung, and their inability to take quick decisions. The regulations—directed lending to the priority sector, for example—have hurt the lenders’ balance sheets, as has the meddling by the authorities. The blueprint for reform suggests the boards are to be given a lot more freedom. For instance, they would have the flexibility to introduce CGM-level positions depending on the needs of the bank, and can also recommend, if necessary, that some GMs be given residual service of two years to ensure they have adequate tenure. Also, lenders would be permitted to make lateral hires for positions such as that of a Chief Risk Officer at a market-linked compensation. Given how lax public sector lenders have been in the past, they would benefit from such talent and experience. The boards would also be able to re-jig the various committees, so that they function more effectively; they would put in place development plans for all senior executive positions so as to facilitate succession planning. The government must roll out these changes quickly because, over the past decade, state-owned lenders have ceded share to their private sector peers in a growing market. It is a fact that the smaller public sector banks simply haven’t been able to keep up with the competition in this digital age, and have no products that can help them differentiate themselves in the marketplace. The disproportionately high wage bills that left less of a surplus for system upgrades should be a thing of the past as natural attrition helps lenders shed flab.

More effective boards and managements that are not throttled by outdated regulations are long overdue. The very slow progress on technology and internet banking has left PSBs with fewer new customers—especially, the young earners. With better technology and service standards, it should not be too hard for PSBs to arrest the decline in their market share in the loan market. They already have a big advantage in their strong liability franchises—given they are owned by the government and perceived to be safer—and should leverage this. The managements must work overtime to complete the merger process quickly, and use the strength of a bigger balance sheet and branch networks to try and regain share. The government must facilitate this by keeping the unions from disrupting the process. Also, one of the main reasons for the poor performance of PSBs has been the compulsion to lend a certain minimum amount to sectors such as agriculture. The government needs to remove these constraints, and make allocations from the budget. That way, the balance sheets of PSBs will be stronger and they will be able to raise money from the capital markets, saving government resources that would otherwise be used to capitalise the banks. That would be true reform.


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