It has now been a little over four months since the government announced a new round of mega-mergers of public sector banks (PSBs). At the time, the merger of the ailing Dena Bank and the healthy Vijaya Bank with the trembling Bank of Baroda (BoB) – announced in 2018-19 – was still very much a work-in-progress, while its perceived gains were still far away from being realised.
A fresh round of mergers of 10 PSBs of varying health and cultural diversities announced on August 30, 2019 was, therefore, not opportune, given the urgency of addressing the issues of bloated non-performing assets (NPAs) and consequential losses suffered by the merger candidates including the anchor banks.
Four months behind us, what is the status of the merger process? As anticipated, the managements of the individual banks are deeply immersed in working out the modalities of integration.
As in the case of the merger of Dena and Vijaya Banks with BoB, formal board ratifications of the fresh mergers were obtained in September 2019, confirming that bank boards are puppets of the government. The CEOs and the general managers keep meeting regularly. Several committees involving middle and senior executives of banks of each group have been set up with a mandate to study and realign each other’s systems, processes, IT platforms, products, organisational structure and human resources systems.
For example, in the case of Union Bank of India (UBI) as many as 28 functional committees are now working with equal representation for the anchor bank (AB) and the two merging banks (MBs), namely, Andhra Bank and Corporation Bank.
During mid-2019, there was a huge gathering of about 80 top executives of these three banks for two days in Thiruvananthapuram, with a multinational consultant on tow to guide the deliberations. I learn that similar exercises are on in the other three groups respectively led by Punjab National Bank, Canara Bank and Indian Bank.
A series of what are called ‘town hall meetings’ were held in major centres where the CEOs of the AB and the MBs assured the invited customers that their interests would be safeguarded. Branch managers were mandated to bring account-holders to such meetings. The meetings with staff members allegedly saw very thin attendance as most unions opposing the mergers gave calls to stay away from them.
Before examining the impact of these exercises, it is pertinent to study the performance of the PSBs during recent months.
FM Nirmala Sitharaman announcing the merger of PSBs. Photo: PTI
Performance in September 2019
How was the overall performance of PSBs during the half-year ended September 2019?
Data published earlier by the RBI shows that between September 2018 and September 2019, the credit portfolio of PSBs expanded from Rs 55.5 lakh crore to Rs 56.6 lakh crore (1.84%) but their share in the total credit of the banking sector came down from 61% to 57%; the gross NPAs came down from Rs 9,92,964 crore to Rs 9,18,487 crore and the operating profits increased by about 74%. The number of PSBs under RBI’s Prompt Corrective Action (PCA) framework has come down from 11 in November 2018 to four now, signifying a steady improvement from the regulator’s point of view.
The question, however, is: can this improvement be sustained?
The RBI’s latest ‘Report on the Trend and Progress of Banking in India 2018-19’ provides some clues. According to the central bank, credit off-take is ‘subdued’ as ‘evident from the slowdown in the flow of resources, both from the banks and the non-banks to the commercial sector in the first half of 2019-20’. There is, the RBI confirms, ‘a reluctance to lend which is exacerbated by credit defaults and increasing frauds’ (emphasis added). This development, it concludes, is ‘worrisome’. The Financial Stability Report, December 2019, further reinforces this view. Rating agencies like Fitch and ICRA too have forecast that credit growth in the current year will be slower.
With the severe economic slowdown, the loans to the MSME sector are deteriorating in quality as per new reports. PSBs under PCA have been reluctant to entertain credit proposals from this sector adding to its misery.
Internally too, banks had not recognised some large loans as NPAs. During 2018-19, eight PSBs had under-reported their NPAs to the tune of Rs 24,000 crore. Apart from the giant SBI, there are among them, PNB, UBI and Indian Bank-three of the four anchor banks which will merge five other PSBs with themselves. Additional provisioning for these NPAs will further dent their profitability in the current financial year.
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The disappointing performance, the gloomy forecasts, the reluctance to lend and the economic slowdown-all these developments make the times harder for the PSBs. Will the weakened anchor banks be able to absorb the ailing merging banks?
During 2018-19, eight PSBs – including SBI – had under-reported their NPAs to the tune of Rs 24,000 crore. Photo: PTI
Impact on the business of merging banks
While the macro-level status is available in the public domain through the RBI data and views of several agencies, at the individual bank level the merger exercise has virtually put the regular banking business on prolonged paralysis.
My frequent interactions with several executives of PSBs and trade union activists reveal the following areas of concern:
More often than not, new accounts and deposits are not entertained. Knowledgeable customers shun approaching the branch managers as they apprehend that after the merger the complexion of the relationship will undergo change.
During the transition, no manager desires to take the risk of accountability from a new management and therefore some credit decisions which are within the powers of the branch managers are not taken.
Middle and top-level decision makers are preoccupied with the endless meetings and video conferences day in and day out; the credit proposals which come under their purview are hardly entertained.
Exercises are on to ‘rationalise’ branches, meaning merger of branches close to each other. As a result, renewal of rent agreements on branch premises is kept on hold.
The machinery on follow-up of stressed assets and recovery is currently stymied for the same reasons.
The collective impact of all these is increasingly visible in the form of very sluggish deposit and credit expansion among the banks under the process of amalgamation.
IT and HR Issues
More vexed issues are those related to IT and human resources management (HRM). In the area of IT, the integration of even identical technology platforms is not as simple as it is projected to be. Within each group, the banks have different versions of what is deemed as common software. To illustrate, every PSB has its own numbering system for its deposits and loan accounts. To both the staff of the MBs and the customers it will cause serious stress in internalising the likely changes. During this time there could be further alienation of existing customers.
The staff of the MBs will also need to unlearn what they have been doing until the merger and learn the new versions of the software in vogue in the AB. Considerable manhours need to be spent in upgrading the skills of the staff of the merging banks.
HRM is a complex issue. A host of questions related to transfers, promotions, placement and disciplinary proceedings keep coming up among the staff of the MBs. The finance minister has claimed that there will not be staff retrenchment, post-merger. The SBI experience contradicts such a claim. As per reports, the headcount in SBI after the merger of its associate banks has actually come down from 2,64,041 in March 2018 to 2,57,252 in March 2019. BoB has issued public notices of its intention to close some of the former Vijaya Bank branches.
More than the likely staff cut down, what worries the staff is the almost certain dislocation. It is learnt that the representatives of the ABs have indicated in the meetings of the functional committees that officers up to Scale IV (middle level) will not be disturbed. That is impractical. Taking the example of Corporation Bank, it has over 750 employees in its corporate office in Mangaluru. Once the merger is completed, as in the case of Dena Bank’s headquarters in BKC, Mumbai, the corporate office loses much of its role and logically, the staff there become redundant. Redeployment of redundant employees and a fresh scheme of voluntary retirement (VRS) become imperative.
An issue of anxiety is the impact on the existing policies governing the transfer of officers. Under the extant agreements, after a predetermined term in a different state, an officer can opt for transfer to her state of domicile and remain in that state till her promotion. After the merger, such repatriation becomes difficult as priority could be given to the staff of the AB. The officer/s who have already completed their terms in different states may have to wait until vacancies arise to get back to their home state/s.
In the PSBs, promotions from one level to the next level take place periodically as per agreements with the recognised unions. With the merger, the agreements of merged entities lose their validity and fresh agreements need to be entered into with the unions. New agreements do not get signed overnight. As a result, the promotion process will get derailed for quite some time causing serious heartburn among a large number of aspirants.
Selection and placement as branch managers will also get postponed until the integration of HR systems is completed. Identifying the strengths and weaknesses of officers of MBs for considering managerial assignments can get bogged down unless the top executives of AB and MBs are able to evolve a transparent process of selection. Aspiring youngsters who are left behind could get demotivated. This will have a long-term impact on the decision making at the ground level with direct impact on` customers.
The disciplinary machinery of PSBs has a bank-specific structure which operates within the framework of a standardised compendium of conduct and discipline regulations applicable to all PSBs. When different structures have to be harmonised, the follow-up action on pending cases gets derailed. With disturbing recurrence of frauds where the people within are allegedly involved, quick action is warranted. A derailed disciplinary mechanism can have a long-term impact on both the banks and their staff who are innocent.
There is also palpable anxiety among the staff of MBs. The experience of the alleged ill-treatment of former Vijaya and Dena Bank employees by the executives of BoB triggered a serious protest from the Bank of Baroda Officers’ Union as recently as September 2019. The news of this kind does cause concern among the staff affected by the current merger exercise.
In addressing these crucial issues, the main stakeholders, namely the employees need to be taken into confidence. That is not happening. And the unions of both workmen and officers are still daggers drawn with the respective managements and the Ministry of Finance. A consensus that is critical for a smooth HR integration thus remains elusive.
The experience of the alleged ill-treatment of former Vijaya and Dena Bank employees by the executives of BoB triggered a serious protest. Photo: Reuters
A disruption that was uncalled for
The current study confirms that given the present economic slowdown and the need for activating the engine of economic activity, forced merger (including the one of 2018-19) of 13 PSBs into bigger five is a serious disruption to the working of the industry with no tangible positive results in the foreseeable future. During the abnormal times the economy is in today, such disruption can be counterproductive. It will take much longer time to stabilise and yield positive benefits. The longer the time, the heavier will be the price in terms of prolonged derailment of the engine of economic growth and consequently nursing the PSBs to robust health.
T.R. Bhat was joint general secretary of All India Bank Officers’ Confederation from 1995 to 2009.