Tamal Bandyopadhyay: The drama called consolidation

Last year in August, Finance Minister P Chidambaram flagged off the issue of banking consolidation at the Indian Banks' Association's (IBA's) annual general meeting (AGM). A week ago, at the IBA's next AGM, he reiterated his call.

While this sounds great, the CEOs of public sector banks are reluctant to take the lead, for the simple reason that after they do the hard work, it is the government that has the power to approve or not approve the deal. Indeed, the merger move between Bank of India and Union Bank was spiked by the Left parties last year.

Any merger between two public sector banking entities can take place under the norms laid down by the Banking Companies Acquisition and Transfer of Undertakings Act 1970 and 1980 "" popularly known as Bank Nationalisation Act.

This Act stipulates that two banks can initiate merger talks but the scheme of the merger must be finalised by the government in consultation with the Reserve Bank of India (RBI) and finally it must be placed in Parliament, which has the right to modify or reject the scheme.

In case of a cross-merger "" that is, a merger between a public sector bank with a private bank "" both the Nationalisation Act as well as the company law are to be consulted and, in this case too, a parliamentary nod is a must.

In other words, unless the government is in a position to push through any merger scheme on the floor of Parliament, banking consolidation cannot take place.

In the public sector, there are 19 nationalised banks besides State Bank of India (SBI) and its seven associates. There has not been a single instance of merger of two public sector banks for consolidation.

The only merger in the public sector took place in 1989-90 when New Bank of India was merged with Punjab National Bank. However, that was a rescue act engineered by the RBI.

Since 1969, when Bank of Behar was merged with SBI till the latest merger of Bank of Punjab with Centurion Bank, all mergers have been part of the crisis management exercise by the government and the RBI to protect the financial system and the depositors' money.

Over the past 46 years, 36 banks and non-banking finance companies have been merged. Out of these, only seven mergers have been driven by consolidation and growth.

They are HDFC Bank's takeover of Times Bank; the mergers of SCICI, Anagram Finance, ITC Classic, Bank of Madura and ICICI with ICICI Bank; and the unification of IDBI Bank with IDBI.

All other instances of marriage between two banks were a rescue act by the RBI with the government support. Notable among them are New Bank of India with Punjab National Bank (1989-90), Bank of Karad with Bank of India (1993-94), Global Trust Bank with Oriental Commercial Bank (2004-05).

Normally, whenever a private sector bank is in trouble, the RBI quietly approaches a public sector bank with a big balance sheet to play the role of the White Knight. Till the time the PSU banks were not listed, the regulator's wish was their command.

As listed entities, these banks are less accommodating. So, SBI refused to take over Nedungadi Bank, which had its net worth wiped out by accumulated losses. Similarly, Punjab National Bank too resisted the move to merge IFCI with it.

The mix-mergers (between two entities in public sector and private sector) have other complexities too. Realigning pay structure is one such issue. Oriental Bank of Commerce has demoted quite a few Global Trust executives and recast their salary structure. IDBI Bank executives fear that such things can happen to them as well when the formal integration process with IDBI gets over.

However, a merger between two public sector banks is an entirely different ball game. Job profiles or salary structure are not issues as there is hardly any difference in the work culture and pay packets in the public sector.

The issues are: who will head the merged entity and what will be the fate of the independent directors (including the government nominees)? So, a weak bank CEO will never take the initiative for consolidation as he always runs the risk of losing his job.

Similarly, only four independent directors can grace the board room of one bank. So, when two entities become one, four directors will lose their chairs.

Extending the same logic, the Parliamentary Committees which periodically visit the bank headquarters to supervise the progress of the use of Hindi or to check on the loans given to weaker sections of society, will find that there will be less banks to entertain them.

All these quarters will resist any merger attempt tooth and nail at the first stage. Even if these hurdles are overcome, will the government be able to cross the Rubicon on the floor of Parliament?

In case of the proposed Bank of India-Union Bank merger, the scheme was killed even before it reached Parliament. Consolidation in public sector banks is not a financial reengineering exercise. It's a political challenge.