Mergers, consolidation on cards for banking sector: Experts

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Q: What about the other line of consolidation that could be looked at ie not looking at smaller but for a larger bank to look at non-banking financial banking companies (NBFC) for instance? We know that IFCI is a company in which the government is keen on reducing and exiting and they maybe looking at a merger with another bank. Do you think NBFCs as well might be up for this merger and acquisition (M&A) action now?

Rao: Definitely banks can do it but the basic question is in terms of the size. Not many NBFCs in the country are as large for a commercial bank to be attracted. The second aspect is the commercial banks, except last year, have been growing at a rate of almost 30% that would add number of NBFCs in one-year. In fact, the recent official document that's available in respect of consolidation is the report on the committee and the financial sector assessment. It's a joint report that Government of India and Reserve Bank of India are aware. They have brought out the issues very clearly - one is in respect of the financial requirement for some of the smaller banks to sustain in the long run. The second aspect is for some of the larger banks to grow into bigger banks, meet the requirements of the economy, especially in the area of infrastructure like some of the other colleagues have just said that there is nothing that prevents two large banks to come together and then become a larger bank.

I do not think that the scope is restricted but we need to also see if those two larger banks have room for capital adequacy because if both the banks are in the threshold of 50s then it become very difficult because again 2+2 will not be a 5. So that's very important. It's not a size, it's not a capital - many aspects need to be taken into consideration.

Having said that in the recent past the government has been very proactive even the present honourable Finance Minister has taken an initiative to call the banks even the former Finance Minister had taken the initiative. There was an occasion the honourable Prime Minister was on record to say that banks should go in for a consolidation. And I was heading two banks and there were occasions where we were told formally in fact I could say the earliest effort formally was way back in 2004. The then Banking Secretary called a few bank chairmen in Jaipur and a half day session was entirely devoted to consolidation and of course nothing was reported in media because none of the people who participated in the meeting gave anything out. But at the time also these issues what are now being deliberated in respect of the HR issues, in respect of the sensitivities of some of the smaller banks were examined.

Now what I feel is that the people who are in the banking industry and people who would like to facilitate consolidation - we need to add the steps and actually the roadmap how they would be able to do then again deliberating these issues. These issues have been deliberated time and again for the last almost near ten years. Now two basic issues: The HR issues. For example, the bank, which is acquiring a smaller bank that particular bank would not many major issues except very marginal but the bank which is being acquired - they are having concerns for e.g. the unions will have concerns, the employees will have concerns, the executives at senior level will have concerns.

So it is those concerns we need to address and I went and actually talked to my unions and associations and I talked to my senior executives. After a series of discussions they were convinced. The question is - we need to convince the people of the other institution. Even at the policy level, I did discuss with the union and association leaders at the all India level. After initial discussion they were willing and amenable to discussion. What we need to do is actually we need to assure them that in terms of a consolidation immediately there wouldn't be any retrenchment or Voluntary Retirement Scheme (VRS) in respect of the bank which has been affected for a period of five years. The senior executives in those banks would have reasonable opportunity to progress and prosper as they would have otherwise done.

Actually let us accept it whether we may like it or not - most of the time we try to show the finger at the unions and associations saying that they have not been very supportive. I do not think that actually even at the chairman level there has been active support. We did deliberate. We did participate in very active seminars but at the same time when the actual consolidation came in the question is when there are two chairs - one chair would be reduced - who would vacate?

I remember way back in 2004, the same point came up. At that point among the five people present there at least two offered saying that we do not mind doing. One of the people who were present in the meeting was Kohli and I was also there. I said that definitely individuals are not more important than the system and the system is much more important. No doubt all these people have grown up in the stature and cadre and have occupied. Government had enough opportunities, enough offer roles for their talent and for their expertise to be used. So we need to go into much smaller issues than actually take our discussion at a global or a macro issue.