The Narasimham reports main recommendations of merger and closure of public sector banks aimed at recast of the countrys banking structure have been termed as untenable by majority of the bankers.
We have had bail-out mergers so far. But strategic mergers, as suggested by the committee, makes sense only if it results in economies of costs. If two banks merge, and if the cost remains the same, then why merge? It remains to be seen, how such mergers will be done in the Indian economy, said Rashid Jilani, chairman and managing director of Punjab National Bank, who oversaw the first merger in the nationalised banking sector between New Bank of India and PNB, an experiment which proved costly for the profit-making PNB.
Deepak Rao, assistant director, financial services consulting, Coopers & Lybrand, felt the PNB-New Bank of India merger has made most banks hesitant about mergers. He however added: But at senior levels in leading PSU banks, they are considering the issue of mergers. Mergers are important for them for their survival, because with capital account convertibility round the corner, they will have to think in terms of growing bigger to manage the large inflow and outflow of funds. Rao said the kind of merger being considered is not with another PSU bank but with the older private banks.
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Another PSU bank chairman said that mergers would make sense only if it brings in rationalisation of staff and branches. He however said: This would be a very difficult task and I do not know how this kind of a merger can be carried out in the current public sector banking set-up.
He cited NationsBank officials as saying last week that the banks merger with the Bank of America (BankAm) will help reduce the cost of operations of the merged entity. That is the kind of merger we should be looking at, the official said.
Bankers are equally dismissive of the suggestion on closure of the weak banks. This is not feasible. The bank unions are very powerful and this is not possible, a PSU bank chairman said.
He said a more feasible plan would be to sell the weak PSU banks to the private sector. I think the weak banks must be sold to the private sector. The government must clean up the balance sheet and find buyers for them in the private sector. I think the committee must have suggested something like this instead of their closure because that just cannot happen, the chairman said.
Another official at a Delhi-based bank said that the Narasimham panel should have looked at the possibility of introducing voluntary retirement scheme (VRS) in the loss-making banks. The VRS must be introduced in some way. And a way must be found to deal with the back log of non-performing assets, he said.