While Nepal decides to drop down the idea of forced merger, India comes in with the proposal of mega merger! What can be the takeaways to Nepalese bankers from positive and negative speculations of Indian mega mergers?

Fri, Sep 6, 2019 9:51 AM on Economy, Exclusive, Recommended, Stock Market,

Nepal government decided to reconsider its “big merger” policy after a lot of criticisms from banks and general public. However, recently Indian government took an exactly opposite step and decided to implement forced merger among its state banks.

Finance Minister, Nirmala Sitharaman, came up with a press conference announcing only six public banks will be in operation in the days to come. The decision of big merger was followed by India’s slow economic growth. Finance minister, Ms. Sitharaman further explained the forced merger would boost the credit lending capacity of Indian banks, making India an ultimate hub for domestic and international lenders. 

The merger history of public banks of India is quite interesting. In 1960, State Bank of India acquired the control of seven regional banks; each bank was given the same logo as that of State Bank of India and renamed each of the banks by adding a prefix “State Bank of” right before its name. These seven banks were State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBN), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashatra (SBS) and State Bank of Travancore (SBT). The merger started in 2008 when State Bank of Saurashatra (SBS) merged with SBI. Following the footstep, State Bank of Indore (SBN) was merged with SBI in 2009. Finally, the cabinet of June, 2016 approved the merger of remaining five banks with SBI. SBI, today, is the largest public bank in India. Besides, the merger of Vijaya Bank and Dena Bank with Bank of Baroda has already taken place.

The Indian government plans to reduce 27 public banks to 12 banks. Those banks enlisted for merger are Union Bank of India, Canara Bank, Punjab National Bank, United Bank, Allahabad Bank, Corporation Bank, Syndicate Bank and Andhra Bank. The proposed merger list is as follows:

The powerful banks after the merger is being called Next generation PSBs  (Public Sector Banks). India is looking forward to make its banking economy to reach newer heights by bringing in loan from several international clients. The merged institute will have a bigger capital base. The ten public sector units which are getting merged will be among the largest banks of India and of comparable size as that of SBI and Bank of Baroda. The business sizes of the banks are given in the table below:

Besides the merger, the Indian government further plans to infuse 52,250 crores capital into these ten merging banks in order to create a stronger balance sheets for these banks. The idea of Next Gen PSBs has been followed by both positive sides and criticisms.

Amidst all these, there are few inferences that can be drawn based on the merger talks in India and those in Nepal. Let us first look at the positive sides and the takeaways Nepalese Banks can infer from these:

The impression of merger among Indian banks and government is quite positive. The CEOs of several banks are positive in regards to the merger. The decision has rather been perceived as a pragmatic approach to attain synergy and efficiency. On the other hand, the merger talks related to several banks in Nepal was not considered in a positive way. It was looked upon as merely a forced merger rather than an idea to create stronger banks. In fact, prior to the monetary policy in Nepal, a lot of speculations were made and banks were consistently looking forward for a merger. However, post monetary policy, the talks of big merger have been slowed down.

There is one more interesting perspective that can be considered about the banking economy of India and Nepal. The Indian banks are motivated to strengthen the overall banking economy of the country whereas Nepalese banks are still skeptical that the merger will work because the boards of directors and executives have to make certain compromises. The purpose of establishing Next Generation PSBs  (Public Sector Banks) is said to be based on slow economic growth of India. The government believes that the merged institute will have a bigger capital base and will likely bring bigger lenders from the international market. On the other hand, Nepalese policy makers and bankers are publicizing the need of hedging policies but are reluctant to go into merger. Time and again, Nepalese government has been focusing the need to bring Foreign Direct Investment and the need to invest in highly productive sectors. These needs cannot be fulfilled until and unless banks have a bigger capital foundation. The reluctance to go into merger by bigger banks points out lack of alignment between government’s vision of the economy and commercial banks’ vision of operation.  Going back to history, NMB Bank and other several banks had to face tough times and difficult legal procedures in order to bring investment of Hongshi cement, so, if valued mergers are not put into perspective, Nepal will keep on facing rejections from international parties to bring in new investment into the country.

India is excited to implement the second phase of merger primarily because of the success of merger of seven associate banks with SBI. One successful merger can bring positivity among several other banks. However, Nepal is still trying hard to bring in merger of two big commercial banks. A success of a bank lies on the hands of executives, board and employees. The reluctance shown by Nepalese bankers to go into merger can point out two different reasons. The first would be the reluctance to let to the name of an entity and the second would be the lack of confidence in its members. The executive positions of the employees in merging banks come as a primary issue while fulfilling the merger process among Nepalese banks.

Recently, Ms. Anshula Kant, who worked for more than 35 years in SBI and a former CFO of the same bank, got appointed as the CFO and MD of World Bank. This partially proves that when banks are stronger and bigger, employees’ efficiency and decision making process will be recognized by international organizations. The merger among banks will lead to a bigger business sized assets and will increase employees’ career prospect as they will be able to handle more challenging credit client portfolio. 

Finally, the big merger in India is looked into as “a short term pain but a long term gain”. However, when the talks of big merger started in Nepal, we looked into it from the perspective of “what ifs”. What if a certain bank will fail? What if the merged institute will have to lay off people? What if the merged institute will not be able to collaborate with each other? We never looked into merger as a stepping milestone to the banking economy. We got so indulged into the negative sides of the merger, the positive sides got overshadowed. Perhaps, this shows how much of confidence we all have in the banking economy of our own country.

All these being said, the author is not asserting that Indian government plan to go into forced merger is a valid decision. There are several drawbacks within the decision. First and foremost, the decision itself came out as an escape to the shocking Indian economic growth of 5% in the last fiscal year. The decision rather came out as a tactic to divert the opinions of general public from the statistic.

Besides, for the forced merger, the Indian government solely took on its own shoulder to decide the banks that would go into the merger. In this regard, the merger is not being done based on theme or nature of business or regional presence of the banks. Rather, the merger is done in order to make the banks look bigger in terms of business size. In fact, Bank of Punjab and Bank of Maharashtra, considered among the horrible banks of India, are left independent. The only factor ensured during this merger is that each and every bank is in the same level of technological advancement. Now, this can be a takeaway for Nepalese banking economy. While the big merger is a need in today’s globalized world, the motive of the merger should not be simply to reduce size rather the similarity among the merging institutes should be identified in order to bring in synergy from the merger.

On the other hand, it has been consistently referred that the Next Gen PSBs will help to escalate credit and India will enjoy an adequate economic growth. However, there is one more concern that is criticizing this analysis. A chunk amount of cash assets of these banks will be spent while amalgamating two or more institutes, so, these banks might in fact lose their capital adequacy. As a takeaway, Nepalese banks should consider what proportionate of amount can be spent on merging institutes so that the credit distributing ability of the bank will not suffer.

 Finally, Nepalese banks and bankers can at least draw several inferences from the speculations made regarding the merger of the PSBs in India and utilize these as the takeaways for merger in Nepalese banking economy. All in all, the takeaway from all the speculations is that big merger is the necessity in today’s globalized world or developing country like ours, however, the focus should be on big yet quality merger.