The Hindu Business Line : Banking synergies

The proposed merger of Centurion Bank of Punjab with HDFC Bank has brought into focus the issue of consolidation. For all the consensus within the banking industry about its strategic imperative, the truth is that, except for those brokered by the RBI and involving banks in some financial distress, mergers and acquisitions have been few and far between. Mark Twain’s quip that everybody talks about the weather but nobody does anything about it, could well be true of b ank mergers.

Clearly, the trigger for any movement towards consolidation must come from the public sector banks, for they, even if not quite occupying the ‘commanding heights’ once visualised for them, are in a position of some strength to initiate moves in this direction. But these entities suffer from institutional and political constraints that come in the way of even banks with clear operational synergies coming together. And as long as these banks continue to be Government-owned (which may well be the case even under a new dispensation at the Centre) it is difficult to see them taking meaningful steps towards consolidation. That leaves only the foreign and private sector banks. The former category sees itself more as a predator in the acquisition game rather than a willing target of acquisition by Indian banks. Thus, only the private sector banks, both old and newly licensed, are left in the merger market. Among the new private sector banks, those that survived the turbulence of their initial existence have every reason to look to the future with optimism and so would be looking for acquisition rather than being the target of one. The older private banks have a history of independent operations, even if they did not grow large enough. Unless their operations suffer a dramatic collapse or their need for fresh capital far outweighs the promoters’ capacity to infuse funds, they are unlikely to offer themselves as candidates for acquisition. Above all, the RBI’s regulatory philosophy that emphasises diffusion of ownership, supplemented by a ceiling on the voting rights of even such fragmented ownership, militates against aggressive moves by industry predators.

This is not to say there are no strategic advantages to be had from mergers. Indian banks are small compared to their rivals overseas. That may not be of competitive consequence now but will be so later when the foreign banks get to enjoy greater operational freedom in the Indian market. Also, with intensifying competition, the sector is seeing a general decline on all key parameters of profitability, such as return on assets, profits per employee, and so on. This highlights the need for bringing about cost efficiencies besides opening up new revenue streams that only size can confer. For consolidation to be truly synergistic, however, it must happen as an evolutionary process rather than through executive fiat.

Related Stories:
HDFC Bank, Centurion boards okay merger plan
HDFC Bank, Centurion boards to consider merger

More Stories on : Editorial | Mergers & Acquisitions | Private Banks | HDFC Bank Ltd

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