Merging PSU’s is a good idea but it’s the execution that will eventually determine their fate

Too big to fail 

Last week, FM Sitharaman announced that the govt has approved a mega-consolidation project to merge 10 public sector banks into 4 units

Put simply, they want to set up larger banks that are flexible enough to give larger and better credit for driving economic development and addressing the slowdown.

Bigger, Better, Stronger! 

That is the principle idea backing this decision. 

The announcement revolved around the size of each post-merged entity in terms of asset base, branch network and technological synergies (primarily). The statistics were overwhelming.

But, FM Sitharaman’s most impressive feat was to refresh the governance norms, that now give the bank boards more flexibility in recruiting, training, monitoring and managing non-official directors. Also, boards can also appoint Chief Risk Officers from the market (at market-linked salaries). 

That is a good (& essential) pinch of ‘private practices’ to the recipe. 

The Big but…..

Theoretically, mergers (especially large ones) are only successful if the post-merger entities can run more efficiently, and Efficiency = Cost cutting.

For PSU banks, that includes the termination of repetitive jobs (Ouch). While bank employees have already opposed the merger and plan on shouting louder, the FM has promised that ‘not a single bank employee will be fired’. 

If that is the case, it’s hard to assess whether the govt is trying to increase efficiency or just creating institutions that are too large to fail – like our very own Air India. 

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