Subir Roy: Policy needed for bank mergers

VALUE FOR MONEY

About a year ago, the head of a prominent south India-based public sector bank identified on a non-attributable basis a prominent south India-based private bank as a takeover target.

He said his boys were examining the target's books and a consultant to oversee the takeover was likely to be appointed soon. The takeover never came and the head of the aspiring acquirer bank has now retired. But the idea  had a respectable bank with financial clout to back it.

The same cannot be said of the announcement later by the head of a Kolkata-based public sector bank that he was also targeting two south India-based private banks! In this case the aspiring acquirer bank was one of the weakest public sector banks and had been considered as such until lately.

Most recently, the head of another public sector bank announced an ambitious plan to make an international acquisition and in a few days moved on to a regulatory position.

It has been open season for some time now for public sector bank chiefs to talk about takeover plans without much eventual action. Some of the non-attributable statements have subsequently been denied and predictably the bank at the other end has also denied that it is at all up for sale.

On the other hand, the one person who never talked about it, the head of Oriental Bank of Commerce, when the time came, moved his organisation swiftly to take over Global Trust Bank, undoubtedly on instructions from the banking regulator and the government. 

The big recent change in the overall banking scene is that as opposed to the earlier phase of free individual talk of takeovers, consolidation in the state-owned banking sector has now been officially blessed.

So it is absolutely imperative to have a policy on takeover among public sector banks. That should put an end to free talk of takeover by senior officials of banks when many of the predators and targets are now listed. 

One blessing in disguise is that this is likely to be a year of declining profits for most banks. They will be deprived of the treasury earnings that over the last few years gave them windfall earnings and emboldened the heads of banks that were considered weak till lately to articulate takeover ambitions.

The declining earnings will separate the men from the boys and hopefully shorten the list of aspiring acquirers. The process of going about it the right way has already started and one of the better-run public sector banks, Corporation Bank, has armed itself with a mandate from its board to look for acquisitions while firmly declaring that the bank itself is not open to a takeover bid.

A declared official policy to govern mergers will allow the system to gain most from a few well- thought-out mergers completed within a reasonable period of time without loose cannons confusing the scene.

This is primarily because the top bank managements are not their own masters. Public sector bank chiefs are all career officials  who in part lobby their way to the top and remain there for variable lengths of time. Most of them who have talked about takeovers will not even be there to personally see the process through.

In both India and mature economies private firms led by professionals who may not have significant personal stakes do play the M&A game but they do so only while enjoying sufficient shareholder confidence and appropriate mandates from their boards.

In fact, takeovers are mostly lengthy processes that are best seen through by the same leadership. Not just hostile takeovers, even the friendly ones sometimes need clearances from the competition regulators of more than one country.

The Indian nationalised banking scene is quite different from this and the chief executives of nationalised banks are really more like senior bureaucrats enjoying the confidence of their political bosses.

The only big difference is that while secretaries to the government get transferred quite often, a nationalised bank CMD is usually left undisturbed to retire, unless of course he has tenure left to move on to greener pastures.  

It is axiomatic that M&As between public sector banks will have to be ultimately blessed by the governments. So the government's assertion that it approves of consolidation and is even thinking of allowing tax concessions for it but will not tell the players what to do, will not wash.

It is time that in the best interests of public confidence and transparency, the government and also the central bank laid down a few rules or principles to govern mergers.

First, norms for separating weak from strong banks for takeover should be laid down so that people do not talk out of turn. For example, reserves and resources need not be an issue. LIC will happily bankroll what Corporation Bank, in which it is a key shareholder, may decide to acquire.

What is more important is whether the acquiring bank has a management culture and style of efficient functioning that needs to be spread and not subsumed under a more efficient management culture.

Second, complementarity and synergy should be declared as key considerations for allowing amalgamations. A marriage between two institutions should only be considered if they are strong in non-overlapping regions.

Similarly, a union should happen between two entities whose management cultures have some kind of affinity. A habitually cautious and a habitually aggressive bank may not jell.

Additionally, some of the most attractive merger prospects can be those where the merged entity has a wider portfolio of business. Two banks, respectively strong in retail and corporate lending, would logically be made for each other. Once such norms are there, mergers can fall into place without there being much opposition or reluctance.

And while on the issue of evolving a policy for nationalised bank M&As, the government should relook at the halfway house that the State Bank of India group is in. Should its subsidiaries be merged with it? Or should the healthier ones with a consistent track record be set free from the laggard parent entirely?