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Mergers & actualities
January, 06th 2010

The submission of a white paper to the government on consolidation sets up an interesting new phase for the countrys public sector banks. Global consultants McKinsey & Co and Ernst & Young had been appointed by the finance ministry to suggest possible PSBs that could be amalgamated to create larger and stronger banks.

They have suggested four combinations, with each proposed entity accounting for a market share of 7-8 per cent. (By way of comparison, the State Bank of India has a market share almost 30 per cent, with Punjab National Bank ringing in second with a share of just 5.2 per cent.)

The suggestions are reported to have taken into consideration factors such as cultural synergies, geographical presence and profitability, besides, of course, market share.

The white paper is just the first step in the endeavour to enable PSBs to command economies of scale and scope and while the process can be complicated, the paper should also serve to immediately provoke an assessment on ways in which PSBs, whatever their size, can be made more responsive to customers needs. That is, bank consolidation cannot be a substitute for banking sector reform.

In the next step, five banks Punjab National Bank, Canara Bank, Union Bank of India, Bank of Baroda and Bank of India will submit a detailed report to the government in March, with each suggesting a suitable merger candidate.

After studying these reports, the finance ministry will write up a possibly final scheme for bank consolidation, which would then be put to the Reserve Bank of India for approval. Thereafter, concrete steps may be taken by the government to actualise the proposals.

It is still early days, and drawing up plans that address duplication and redundancies will be complicated and would determine the effectiveness of the proposed mergers. But with this first step, the white paper, the government should make it clear that decision-making will be participatory and will not be blanketed upon banks.

There is, through it all, the big question. Will the government muster the political will to pull off bank consolidation? Mergers are always stressful processes for employees, and given the abandon with which public sector personnel take recourse to strikes, banks need to prepare their staff for the deliberations ahead.

They can only accomplish this if the government demonstrates enough resolve at even this early stage.

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