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Beyond the Merger Mania

Is smaller still beautiful in the Indian banking sector?

 

Over the past decade and a half, India has evidenced several important mergers of public sector banks (PSBs), but the frequency at which such mergers have panned out in recent times—particularly, between April and August 2019—is without any precedence. Following the merger of Vijaya Bank and Dena Bank with the Bank of Baroda, effective April 2019, the finance minister has declared four more mergers: Oriental Bank of Commerce and United Bank of India with Punjab National Bank (PNB), Syndicate Bank with Canara Bank, Andhra Bank and Corporation Bank with Union Bank of India (UBI), and Indian Bank with Allahabad Bank. While the consolidation will bring down the number of PSBs in this country by almost half, it will increase the average size of the merged entities. For instance, a merged PNB is estimated to assume one and a half times its current size, while both Canara Bank and UBI will be double their respective sizes. But, can this scaling up really restore the dwindling efficiency of the Indian PSBs?

In the first place, empirical evidences are rather ambivalent regarding the correlation of size and efficiency of banks, especially beyond a threshold size limit of say $10 billion or so in assets, within/at which the necessary economies of scale can be accrued. That bigger size does not necessarily mean better performance has already been demonstrated by certain PSBs in India that outperform the private sector banks in size. However, they flounder when it comes to the comparison of the market value of their assets with the latter. A classic example at hand is that of the State Bank of India (SBI), consolidated in 2017 during the previous tenure of the current government. Despite a business of ₹ 52 lakh crore and market share of almost 22%, the SBI’s price to book value is nearly one-third of that of HDFC Bank, while the latter’s business and market share are almost a third or less of that of the SBI.

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Updated On : 1st Oct, 2019

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