The Hindu Business Line : Consolidation bug bites the PSBs

NO SOONER DID the Finance Minister, Mr P. Chidambaram, suggest greater consolidation in the banking industry than public sector banks (PSBs) began announcing to the world that they are in the market for acquisitions. There have been reports of Corporation Bank, Oriental Bank and Allahabad Bank, to name a few, airing plans to expand their reach and scale of operations through mergers and acquisitions. Quite apart from the strategic imperatives of such a move, the development also demonstrates a new sense of confidence about the future. Gone are the diffidence and a mindset that tended to view mere survival as an achievement when pitted against a new breed of private players. No doubt, the birth pangs and a rising infant mortality among the new private entrants have given the PSBs the confidence of a grown-up. Now, the PSBs are not only sure of holding their own, but also flourishing, the intensifying competition and all.

For the Government, one suspects, this synchronised appetite for acquisitions is a convenient device to expend the strategic energies that have been building ever since its predecessor announced the disinvestment policy but which this regime had to put a lid on in deference to the sensibilities of the Left that would not countenance any divestiture of PSBs, strategic or otherwise. After all, significant infrastructure has been created within the Government for negotiation of `technical cooperation' agreements (euphemism for committing to a new policy agenda) and funding arrangements negotiated with foreign agencies, preferably at the salubrious headquarters of these agencies. The symbiotic relationships evolved with a plethora of financial advisors, investment bankers, management consultants and the like too have to be nurtured till such time the political environment changes in favour of disinvestment once again. While that may be the realpolitik behind the new official enthusiasm for consolidation, the process itself is not without its strategic purpose.

The presence of so many PSBs is quite simply the outcome of a sense of socialist ideology that would grip governments from time to time since the late 1960s to the early 1980s. Thus, the many manifestations of public ownership within the banking industry did not represent any strategic forethought but rather a reflection of political expediency of the moment. In the event, there is nothing the Government cannot achieve with fewer banking entities than there are now. The operational synergies in the form of rationalisation of branch network and staffing that the consolidation would release is a bonus. It is worth remembering that in perhaps no other sector is there scope for capturing economies of scale as in the banking industry. From `banking solutions' software to ATM networks, size confers enormous advantage. That operating expenses as a ratio of total assets have stagnated in recent years, or that the net interest spread refuses to grow reinforces the case for some efficiency gains through consolidation. But banks have to be good at their core function — of lending to credit-worthy borrowers at a cost that leaves a reasonable surplus for its shareholders.

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