The public sector bank merger is a good time to think of what scale banks should ideally be
04-Sep-2019 •Dhirendra Kumar
Some old names in Indian banking are going to be history soon. Names like Oriental Bank of Commerce, Syndicate Bank and Allahabad Bank, which have been part of the Indian banking landscape for decades, and in the case of the latter, for more than 150 years, will pass into history. However, I seriously doubt if anyone is experiencing any feeling of nostalgia, except perhaps some old employees of these banks. The reason is that banks are entirely unloved businesses. That's true of not just these public sector banks but all banks, perhaps across the world. I have been a customer of about 7-8 banks in my life, both personally and for my business, and I have never had any fondness at all for any of them, as one can have for some other organisations that one deals with.
In fact, except for brief periods here and there, one always feels more like a hostage than a customer. Not just that, given the enormity of the mess in Indian public sector that has been created over the decades, I'm sure that decision makers in the government feel like hostages too. Therefore, the passing of these banks is just an economic event, an attempt to somehow reduce the extent of the problems in weaker public sector banks.
While reading people's reactions to these mergers and chatting personally with those who understand the issues, I realise that there are two kinds of fundamental views that people have: There are those who believe that size is good for banks and the larger the better; and there are those who believe that large size is a dangerous thing and that under some limited circumstances, it's a necessary evil. This is true of all business, not just banking--some of the most interesting examples in the world today are companies like Google, Amazon and the like. However the FAANGs are a different kind of danger and that's a story for another day.
As it happened, just a few days after the announcement of the great PSB merger, I happened to have a nice long chat about banking with the CEO of a small bank that is at the very opposite end of the spectrum from the government-owned behemoths. This is City Union Bank, headquartered in a small Tamil Nadu city of Kumbakonam, which has the highest concentration of probably the most amazing temples in our country. CUB is an unadventurous, conservatively run bank which is based on the idea that banking is a simple business, which can be grow steadily and stay safe--for itself and for others--as well as successful, as long it doesn't try to cross the line into the kind of risks that don't fit into its scale.
In an alternative universe, there could have been a couple of thousand banks of this sort in the country, and that could enable the same quantum of banking services to be provided with far greater systemic safety. One can think of many obvious objections to this idea, but if it was coupled with robust auditing, transparency and credit rating systems, along with a large and liquid corporate bond market, there isn't much that cannot be achieved. However, at the point where we are, the whole thing is little more than a fantasy, a sweet dream that cannot come true.
Even so, one must recognise that size in banking is a source of danger. I wish that the powers that be recognised that banks being ever larger is a necessary evil, and paying attention to word 'evil' is more important than 'necessary.'