8 Reasons Why PSB Merger is not a Great Idea

1. Merger will not by itself create a globally large bank: Even if you take the largest of the mergers that have been proposed, which is PNB combining with two other entities, it’s going to give you a bank which is about one third the size of the 50th largest bank in the world, which is not saying much.
2. There is no correlation between size and efficiency: Second, the correlation between size and efficiency is suspect beyond a certain minimum size. And that size is quite low: say $10 billion in assets or so you get the necessary scale of economy. Beyond that, the empirical evidence does not suggest there are many great advantages to simply growing bigger. The classic comparison is between HDFC Bank and the consolidated State Bank of India, which is many times its size. The price to book value ratio of HDFC Bank is close to 4, whereas the price to book value of SBI is around 1.25. Therefore, the suggestion that getting bigger is going to, in itself, give you some benefits is not validated by experience, either internationally or within India.
3. Timing of merger amidst slowdown is not good: From a timing point of view, this does not seem an ideal time for going ahead with these mergers. Because, as all of us are aware, the economy is clearly going through a major slowdown. And it requires all hands on the deck. And whenever a merger of such scale happens, I think the senior management gets distracted in terms of trying to make sure who gets what.
4. Prerequisite for Merger success may not be there: In order to make a success of a merger, you need two conditions to be satisfied — you need a very high degree of managerial ability, and at least one of the entities in the merger must be financially strong — I’m afraid I can’t see either condition being satisfied in the mergers that are being proposed.
5. Big bank need not mean better performance: If you’re not able to make a success of your operations and deliver the performance of your existing level of assets, how does the management propose to make a success of a much bigger and more complex entity? The question is not answered simply by citing the theoretical scale economy.
6. No thematic specialization of merged entities proposed: I don’t think there’s any identity which they have tried to create for each of these merged entities in terms of trying to say, one will be focusing on Corporate, one will be on Small and Medium Enterprises, one will be Retail. There’s been no thinking in terms of any or each of these banks’ focus on a particular theme, particular skill-set and developing expertise in a space which is important as far as the overall economy is concerned.
7. Can’t layoff employees even after merger: Here, even if you rationalise the branches, a commitment has been given that people will not be laid off. That is one of the assurances given by the Ministry. And therefore, it’s not clear how any cost economies will be effected... if people are to be retained and yet be redeployed for other purposes.
8. Small SMEs may be impacted: From a lending perspective, the impact will be felt more for the SMEs and small businesses, who have a lot to gain from the personal contact they have with a local person. And as that becomes a lot weaker, that can impact... That is something which we will know only as we go along.