Revamping the banking industry in India - Mergers are the way forward - An Ethmotican Analysis

The State Bank Group family

We are publishing this article in response to some articles, particularly the one that appeared on Firstpost (click here for the same) which are advocating the independence of associate banks from the State Bank Group and are actually advocating creation of more banks citing various reasons, some with logic and some totally without any sense.

Hence, we at Ethmos consider it our duty to bring the complete picture before the public and all the stakeholders regarding the implications of merger as well as de-linking of associate banks from the State Bank Group.

First of all, let us make our stand very clear.  Ethmos is totally pro-merger and totally supports the stand of the government that fewer banks will be better able to survive in the evolving economies of today and hence, we in Bharat should have only 4-5 large banks that will cater specifically to each segment of the economy - i.e. one bank for general public like for savings, personal loans, housing loans, car loans, etc. (we will call it the Public Bank of Bharat), second for the business class for services of current accounts, business loans, export-import transactions, etc. (we will call it the Business Bank of Bharat), third exclusively for the agriculture sector (Agricultural Bank of Bharat), and another bank for all other miscellaneous segments of the economy, which will also act as the treasury for other banks.

Now that we have made our stand crystal clear, let us show you the logic behind this.

Benefits to the banking system, government, and the economy in general:

1.  Any simple banker will tell you one fact for sure - a defaulter in his bank is the biggest depositor in some other bank - and the poor banker despite having complete knowledge of this fact can do nothing against him to recover the public money other than filing a civil suit which will drag for centuries and eras together to get the verdict by which time the fourth generation of both the banker and the defaulter would be fighting the cases in the courts.  If we have fewer banks, then the public is not spoilt for choice where to keep their monies and they have no option but to deposit it in one of the four banks in the country which will make it very difficult for him to evade his repayment obligations.  This will drastically reduce the default percentage and hence reduce the non-performing assets of the banks, resulting in higher profits due to lesser provisioning requirements (because for every Re. 1/- turning into a non-performing asset, i.e. if a Re. 1/- loan is not repaid by the borrower, then the bank has to keep Re. 0.25/- out of its profits as a reserve to prevent banking crisis and payment to the depositors.  This provisioning amount increases year on year if the overdue money is not recovered and after the fourth year, if the loan still remains overdue, the bank has to keep 100% provision, i.e. Re. 1/- provision for every Re. 1/- not repaid by the borrower).  Hence, the merger will reduce the defaults in the banking industry and help in cleaning up the system in a big way.

2.  Recently our RBI has introduced the concept of bank account number portability in Bharat and the banks are gearing up for the same by linking all multiple accounts of a single customer (person with the same PAN number or voting card number).  This job will get much much easier and simpler after merger of all the banks of various hues and colors in our country.

3.  Asset and resources management of the banks will become more efficient and streamlined once merger is effected because then there will not be branches of 10 different banks lined up in the same locality paying rent, electricity, and all other expenses just to get the banking business from a common set of population in a geographic area.

4.  The services offered by all the public sector banks are more or less the same like deposits, loans, money transfers, etc.; just the cost of the service differs from bank to bank depending on the bank's requirement and market conditions.  Once all banks are merged into one, there will be uniformity of rates and the same will be controlled by the RBI depending on domestic and international economic conditions rather than profit considerations.

5.  Branch network will be utilized in a much efficient and better manner with the government getting a clear picture regarding the "overbanked", "banked", and the "underbanked" areas and taking corrective measures.  For example, majority of the banks center their branches around metros and bigger cities while many of the tier III cities, semiurban, and rural areas are either ignored or just banked with multiple banks in the single geographical area, which is not of much use for either the banks or the public over there.  This anomaly is a huge strain on national resources and will be corrected after the merger of the banks.

6.  No more black money worries since it will become much easier and cheaper to maintain the internet banking and mobile banking platforms and slowly and systematically, physical cash can be eradicated from the economic system since physical cash is the base on which the mountain of black money economy stands.

7.  The merger will result in huge cost reduction for the economy as a whole because different banks will not be issuing multiple cheque books, ATM cards, credit cards, etc. to the same customer.  To print one cheque book of say 20 pages costs around Rs. 100/-.  Suppose if a customer X is having accounts in say 5 banks as of now, then he will taking at least 20 cheques from each bank and that too for just transferring the money from one bank to other.  (Just calculate the physical and environmental cost of printing these cheque books that could have been easily avoided).  After the merger, this requirement and the cost associated with it will completely vanish.

Benefits to the public

1.  No need to maintain multiple accounts in a multitude of banks for the general public.

2.  One stop shop for all banking requirements.  Instant credit of cheques unless one is giving cheque from one bank to other for clearing - majority of the clearing transactions will be converted to simple transfer transactions.  This will decrease the huge load on the army of clearing houses maintained across the country as well as the RBI headquarters which has to deal with RTGS and NEFT transactions.

3.  More and better uniformity in systems and procedures - presently, a person declined a loan in one bank, takes it from the other bank.  Money will become a precious commodity and getting the same will require one to prove his/her worth or mettle.  We believe that this will surely curb the menace of inflation in the country.

4.  Better branch network availability, because after the merger, the branches will be distributed as per the population requirements rather than "business requirements of individual banks."  Presently, all banks are vying to get a smaller or bigger portion of the same pie - after merger, there will be no pie at all - instead, the banks will become the pie.

So, finally we would like to conclude our views with the advise to our government to follow this model, which is an international best practice followed by all the major economies in the world including US, China, Russia, etc. and the long-term benefits will far outweigh the short-term problems enumerated in the numerous articles advocating delinking and creation of more banks.  Furthermore, the strike by the unions seems more like an attempt to save their own power-centers at different banks rather than any improvement in the banking industry as a whole.

Your comments and suggestions are most welcome.

Happy Ethmos to all!