The Hindu Business Line : When one plus one is eleven

Bank chairmen, most of whom will retire through 2005 and have nothing to lose, are up on the idea of creating big balance sheets with most going by the cliché "size is all." At one meeting the Finance Minister is reported to have told bankers he would not be the in-house priest to match horoscopes and ring wedding bells though he would surely like to be present at the feast that follows.

With New Delhi owning 51 per cent stake in government banks and RBI some 55 per cent in SBI, Mr P. Chidambaram cannot pretend nonchalance. Nor do banking laws allow for the luxury. If two nationalised banks agree to merge, the Finance Ministry and RBI will sketch a scheme under the Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970, as provided for in Section 9 (2C) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

A firmed up scheme will have to be placed in Parliament with the legislators having the right to make modifications without scrapping the merger, going by bankers scanning various provisions of banking laws. In the new merged entity, government will continue to have 51 per cent stake and appoint two directors on board.

Bank mergers will happen on balance sheet strengths or (which is the same) the quantum of gross and net NPAs with geographical reach taking second place. Government banks can be rated on the basis of gross and net NPAs plus provisioning as otherwise each is boringly the same.

Government banks have a good branch spread (except probably in the north-east) and a single street usually houses branches of at least five to six banks. A merger could see a drop in the number of branches (with some being clubbed together and others shut) and the workforce (including officers).

Banks could see at least 30 per cent to 40 per cent of its personnel retiring in the next three to four years as most joined the industry in the late 60s and early 70s and a second VRS could see them quitting earlier. Also, a second VRS may be less of a financial strain than the first some time ago as the residual years left are put at around four years.

Amalgamated banks could also see IT costs for updating money and information flows across branches halving which could pay for the second VRS.

The Narasimham Committee had talked of mergers and amalgamations and some bankers do see changes by 2006 as the process is not going to be easy. A couple of years ago, government-owned New Bank of India was merged with PNB and some say the scars on PNB are still too visible.

Any merged bank will start with a stronger capital base but will not be able to add on with government refusing to bring down its stake from 51 per cent to 33 per cent as wanted by the Narasimham Committee. Will the public benefit much from the swap ratios as most banks have some public stake though at the annual general meetings they cannot speak.

Most importantly will all this mean a smile for the public queing at the bank counters?

That spring day will come when the government quits running the banking system.

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