Read this article on Swarajya Magazine
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Recently, there have been some murmurs from some corners that PSU banks should be merged for reasons that include, among others, improved efficiency, greater coverage, increased competitiveness, and greater muscle to compete with private banks.
The reasons behind such suggestions, however well-intentioned, are fundamentally flawed. For one, the field of play is not at the same level for the private banks and PSU banks. Without such an equality established, the idea of PSU banks competing with private banks cannot be termed as fair. Let me enumerate the reasons.
PSU banks come from an era when Internet banking, Phone banking, and even ATMs had not yet arrived. These banks invested heavily in real-estate and established physical branches at different cities, sometimes at multiple locations within the same city. Each of these branches had to be staffed with people. When the age of Internet and mobile phones arrived, PSU banks had to add-on to their branch-heavy infrastructure with an equally heavy IT infrastructure. The costs of maintaining physical branches, staff, and IT infrastructure not only adds to high operational costs of PSU banks, but also leads to redundancy of resources.
Compare this to the private banks in India who have a substantially lower branch density which they augment with a large ATM network within the city to provide basic banking facilities to consumers. Additionally, phone banking and Internet banking reduces customers' need to visit branches very often. This gives private banks flexibility to rationalize on the number of branches and reduce costs of real-estate and wages.
Technically, it could be argued that PSU banks could also fashion such an optimal channel strategy to rationalize costs, but this is easier said than done. PSU banks are heavily regulated by the Government. They are mandated by the Government to open branches in rural and semi-urban areas where private banks rarely have a presence. Many of these rural and semi-urban branches are practically running in losses since the business generated by these branches is not even enough to cover the costs of operating the branches.
Moreover, with strong employee unions present in PSU banks, it is nearly impossible to lay-off people in case the banks decide to shut down the loss-making branches. Having a large number of redundant staff will not only lead to massive inefficiency in operations, but will also lead to a lot of negativity among the employees, thereby adversely affecting the banks' performances.
This is also the reason why PSU banks have not been able to utilize outsourcing options because it entails laying off redundant staff which the Unions will fiercely oppose.
Finally, every PSU bank worth its salt has a branch in the most important commercial areas of any city. These branches are, without doubt, responsible for a significant share of the banks' business. If two PSU banks are merged, then what happens to their respective branches in the same areas? Which branches will be shut down and which will be retained? Which set of staff will be laid-off and which ones will be retained? There will be many such insurmountable issues.
Unless PSU banks are given the same freedom and flexibility as private banks (or, are privatized), the idea of merging PSU banks is akin to pushing them down the path of disaster. This is a sure shot way to decimate them.
A more reasonable solution may be seamlessly integrate banking between different PSU banks so that customers are able to access banking services for their accounts in any PSU bank irrespective of the bank they opened their accounts in. This might also open opportunities for PSU banks to share a common ATM network, common Internet banking and phone banking platforms.
Unless the Government wants to deliberately bleed PSU banks to the point whether they can be put up for sale to private players at throw-away prices, the strategy of merging PSU banks is inexcusably ill-thought.
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Recently, there have been some murmurs from some corners that PSU banks should be merged for reasons that include, among others, improved efficiency, greater coverage, increased competitiveness, and greater muscle to compete with private banks.
The reasons behind such suggestions, however well-intentioned, are fundamentally flawed. For one, the field of play is not at the same level for the private banks and PSU banks. Without such an equality established, the idea of PSU banks competing with private banks cannot be termed as fair. Let me enumerate the reasons.
PSU banks come from an era when Internet banking, Phone banking, and even ATMs had not yet arrived. These banks invested heavily in real-estate and established physical branches at different cities, sometimes at multiple locations within the same city. Each of these branches had to be staffed with people. When the age of Internet and mobile phones arrived, PSU banks had to add-on to their branch-heavy infrastructure with an equally heavy IT infrastructure. The costs of maintaining physical branches, staff, and IT infrastructure not only adds to high operational costs of PSU banks, but also leads to redundancy of resources.
Compare this to the private banks in India who have a substantially lower branch density which they augment with a large ATM network within the city to provide basic banking facilities to consumers. Additionally, phone banking and Internet banking reduces customers' need to visit branches very often. This gives private banks flexibility to rationalize on the number of branches and reduce costs of real-estate and wages.
Technically, it could be argued that PSU banks could also fashion such an optimal channel strategy to rationalize costs, but this is easier said than done. PSU banks are heavily regulated by the Government. They are mandated by the Government to open branches in rural and semi-urban areas where private banks rarely have a presence. Many of these rural and semi-urban branches are practically running in losses since the business generated by these branches is not even enough to cover the costs of operating the branches.
Moreover, with strong employee unions present in PSU banks, it is nearly impossible to lay-off people in case the banks decide to shut down the loss-making branches. Having a large number of redundant staff will not only lead to massive inefficiency in operations, but will also lead to a lot of negativity among the employees, thereby adversely affecting the banks' performances.
This is also the reason why PSU banks have not been able to utilize outsourcing options because it entails laying off redundant staff which the Unions will fiercely oppose.
Finally, every PSU bank worth its salt has a branch in the most important commercial areas of any city. These branches are, without doubt, responsible for a significant share of the banks' business. If two PSU banks are merged, then what happens to their respective branches in the same areas? Which branches will be shut down and which will be retained? Which set of staff will be laid-off and which ones will be retained? There will be many such insurmountable issues.
Unless PSU banks are given the same freedom and flexibility as private banks (or, are privatized), the idea of merging PSU banks is akin to pushing them down the path of disaster. This is a sure shot way to decimate them.
A more reasonable solution may be seamlessly integrate banking between different PSU banks so that customers are able to access banking services for their accounts in any PSU bank irrespective of the bank they opened their accounts in. This might also open opportunities for PSU banks to share a common ATM network, common Internet banking and phone banking platforms.
Unless the Government wants to deliberately bleed PSU banks to the point whether they can be put up for sale to private players at throw-away prices, the strategy of merging PSU banks is inexcusably ill-thought.
