Union finance minister Pranab Mukherjee has ruled in favour of the Reserve Bank of India (RBI), rather than the Competition Commission of India (CCI), regulating bank mergers and acquisitions (M&As). This is right as RBI has unique historical expertise in supervising the banking sector whereas the commission is a relatively newborn entity. As a transitional policy this may get applied to the insurance sector also with the Insurance Regulatory and Development Authority (IRDA) being the relevant institution. However, in the long run and as the CCI comes to establish itself as a credible and competent organisation, with adequate inhouse expertise in the financial sector, there is no reason why the CCI should not be the institution overseeing all M&A activity, across sectors. The challenge of evolving a policy on consolidation among public sector banks is complicated by the fact that the government is the owner on both sides of a proposed M&A deal. There is some urgency in evolving a clear policy in this regard as the issue of further merger of State Bank of India (SBI) subsidiaries with the parent body is already on the table and Left parties, which seek to consider foremost the interests of the unions, are opposed to the idea.
Two such mergers — of the State Bank of Saurashtra and State Bank of Indore — have already taken place and the finance ministry and the bank management are keen to merge the remaining five. The mergers have so far gone through smoothly because the two merged banks were weak and the ministry and SBI sensibly when about the task step by step, digesting the fallout of one step before taking another.
But the problem is that merging all of SBI’s subsidiaries with itself is being touted as a good thing in itself because it will supposedly make for an Indian banking biggie with an adequately large balance sheet, which will facilitate lending to large infrastructure projects. The second, even more doubtful, reason cited is that mergers will reduce costs and overheads. First, you don’t need real down-the-line operational mergers to get the benefit of a large balance sheet. That can be done by forming a holding company and publishing a consolidated balance sheet without changing operational realities one bit. As for saving costs and overheads through a merger, abolishing posts in public sector organisations is notoriously difficult. What usually happens is redesignation through change of nomenclature. Two real issues are not talked about at all. One is the operational efficiency of a behemoth, which keeps getting bigger.
Use of information technology helps but at the end of the day people have to manage people and real decentralisation is difficult to achieve. Inevitably, the attention given to personnel issues is inversely related to the size of an organisation. The other real issue is grassroots knowledge. Today, when initiating financial inclusion and making it a business success is the biggest challenge before the banking sector, knowing a region intimately is an invaluable asset. It makes for both quick expansion of basic banking and sound support to small and medium businesses. Several SBI subsidiaries have a deeper grassroots feel than SBI proper. What is ideally needed is a case by case approach — formalising what has been done till now by default as a result of multiple pressures for different sides. Merge something if it is weak but, not to speak of merging, give greater autonomy to healthy operations that have their feet firmly planted on the ground.
