So long as banks of all shapes and sizes minted money by the simple method of selling their investments in government securities at ever-higher prices, thanks to a continuous slide in interest rates, there was little incentive for banks to go in for mergers and acquisitions. |
Now that the tide has turned, and banks have to go back to the difficult business of lending in order to make money, new strategies have to be crafted and innovative methods explored. More capital will have to be found to expand the loan portfolio. |
Technology and risk management techniques will have to be state-of-the-art so that banks can prepare for Basle-2. Resources and a large branch network will be needed to cater for the runaway growth in credit. |
One obvious strategy is to go in for mergers and acquisitions. The need for consolidation in Indian banking was pointed out as early as the first Narasimham committee, which advocated a few large national banks and a second tier of regional ones, but M&A activity since then has been based not on a grand design but on the need to protect the depositors of sick banks. |
Recent reports that the government is considering consolidation in the sector could finally presage serious action. |
It's important to recognise that size is no guarantee of success. To be sure, a bigger bank will more easily be able to take on larger exposures, and a countrywide network of branches will be able to garner more deposits and offer more services to customers. |
But, as the success of some of the new private sector banks has shown, aggressive and innovative strategies can help overcome the handicap of being a smaller bank. |
That truth is also borne out by this year's best bank, Vijaya Bank, which is a middle-of-the-rung nationalised bank that has topped the charts on profitability and ranked third on the productivity parameter. As a matter of fact, none of the top 10 banks, ranked by performance, is a giant in size. Foreign banks, which have a much smaller operation in this country than their domestic counterparts, have cornered a large share of non-fund-based income. |
It's also important to realise, as the participants of this year's Banking Roundtable point out, that a reduction in costs is key to the success of mergers and acquisitions. |
Lower costs could be on account of making better use of technology, and it's very important accordingly to ensure that the systems of banks which intend to merge can talk to each other. |
Another important benefit of a merger is the ability to cut manpower costs. In India, despite all the talk of re-deploying excess staff as salespeople, it isn't easy to convert clerks into salesmen, and the presence of strong trade unions in the public sector banks makes rightsizing difficult. |
So while the marriage season for banks may be about to begin, as the Banking Annual points out, many issues will have to be thought through before any merger. |