Tamal Bandyopadhyay: Takeover fever in Indian banking

M&As are becoming all the rage among public sector banks

The Chennai-based Indian Bank wants to take over a local bank. The noteworthy point about this ambition is that Indian Bank only recently came out of the red.

Indeed, the bank has had the dubious distinction of posting the highest-ever net loss by any domestic bank in the mid-1990s "" over Rs 1,600 crore "" which wiped out its net worth.

Unusual as this may sound, Indian Bank is merely reflecting the intentions of many other government-owned banks, all of which seem to be in a hurry to enter the mergers and acquisitions (M&A) game.

The trigger for this has been Finance Minister P Chidambaram's speech emphasising consolidation in the banking industry, at the Indian Banks' Associations' annual general meeting in Mumbai in the last week of August. Ever since, there has been an orgy of speculation over who will be predator and who will be prey.

There are three categories of banks that want to play the M&A game in a big way. First, there are banks (like Indian Bank) that have survived on the government's largesse in the form of thousands of crores of recapitalisation bonds over the past decade. They are now keen to take over banks to become strong and acquire widespread reach.

In the second category are two types of banks. In one group are reasonably strong public sector banks (like Union Bank) that want to acquire a bank with an overseas presence to become global entities. The other type are banks that have been looking at increasing their domestic presence.

For instance, Bank of Baroda "" which has a solid presence in western India "" has started looking out for opportunities in the north, east and south. Vijaya Bank, which is based in Bangalore, will pick up a northern bank and Punjab National Bank, headquartered in Delhi, will look southwards.

In the third category, are "make-believe" M&As that are purely personality-driven. These are banks headed by CEOs who were denied opportunities to head big banks and are believed to be taking the initiative to acquire other banks so that they can prove their leadership qualities.

Historically, bar a few instances, all M&As in India have been part of crisis management. They are forced by the regulator "" the Reserve Bank of India (RBI) "" to protect depositors' money. While the Centre floats recapitalisation bonds (over Rs 22,000 crore) to keep the public sector banking industry solvent, the RBI forced the merger of weak private banks with public sector banks.

Over the past 45 years, 34 banks and non-banking finance companies have been merged (see chart). Most of the mergers were triggered by the move to protect depositors' money and the merchant banker for these M&As was the regulator. The notable exceptions are HDFC Bank's take-over of Times Bank and the merger of SCICI, Anagram Finance, ITC Classic, Bank of Madura and ICICI with ICICI Bank.

Now Chidambaram seems to be ready to force mergers in the public sector for growth. This is not novel, however. Former RBI governor and the chief architect of financial sector liberalisation M Narasimham talked of this over a decade ago.

India is a hugely over-banked and under-serviced country. There are close to 100 scheduled commercial banks, four non-scheduled commercial banks and 196 regional rural banks (RRBs). The State Bank and its seven associates have about 14,000 branches; 19 nationalised banks 34,000 branches; the RRBs 14,700 branches; and foreign banks around 225 branches.

If one includes the branch network of old and new private banks, collectively the spread could be over 68,000 branches across the country. Besides, there are a few thousand co-operative bank branches. On an average, one bank branch caters to 15,000 people.

However, only one bank "" State Bank of India (SBI) "" is among the top 200 banks in the world. So it's only natural that consolidation is urgently needed.

Of course, none of this will be easy. Apart from legal and ownership issues (four out of 19 public sector banks are listed; the four banks that are wholly owned by the government are Central Bank of India in Mumbai, United Bank of India in Kolkata, Indian Bank in Chennai and Punjab & Sind Bank in Delhi), technology will play a big role in the consolidation game.

Oriental Bank of Commerce was chosen over other suitors for Global Trust Bank because they shared the same technology platform. If two banks with two different technology platforms plan a merger, hundreds of crores of rupees will go down the drain.

Finacle "" a core banking application of Infosys "" dominates the Indian banking industry but it is not the only software that is used by the banks. There is Flex-cube from I-Flex and several others.

For instance, SBI uses Finacle for its overseas operations but in India the entire SBI family uses an Australian banking solution FNS-Bancs 24 while the systems integrator is TCS. The only other bank that uses FNS-Bancs 24 is Indian Bank.

Theoretically, if any other bank wants to merge with State Bank, it will have to dismantle its technology platform, Indian Bank being the exception.

Similarly, the range of software for treasury operations is quite wide. The list includes Kondor+, Kastle, iDEAL, ITMS and many others, while the vendors are Reuters, Unisys, Oracle, TCS, Credence, ICICI Info, Bloomberg, Synergy Login and a few others. Here too, software synergy will become an issue during mergers.

Human resources is another sensitive issue on the road to consolidation. In 2001, about 11 per cent of the over-8 lakh strong bank employees opted for the first-ever voluntary retirement scheme in the state-run banking industry. The consolidation drive will make more employees redundant, a political time bomb ticking away.

Besides, it will also call for large-scale redeployment of employees. Traditionally, employeesin public sector banks are loath to move from one table to another of the same branch. Now the trade unions seem to be willing to allow mobility for employees within a district. Mergers will force them to move from one state to another.

Finally, even if there are synergies in technology, geographical presence and profile of assets, the birth of mega banks through mergers may not be of great use unless the mindset of public sector banks changes. Having chased zero-risk government bonds in a low interest rate regime, most bankers have forgotten the art of lending. Unless they re-discover this, consolidation will be meaningless.