The Hindu Editorial Analysis – Daily Reading & Vocabulary Building

For its sheer magnitude, the scale and the ability to disrupt the status quo, the mega bank mergers announced by Finance Minister Nirmala Sitharaman on Friday must go down as the most significant the banking industry has seen in the five decades since nationalisation. The bottomline is clear: to create banks of global level that can leverageeconomies of scale and balance sheet size to serve the needs of a $5-trillion economy by 2025. The jury is, of course, out on whether this strategy will succeed.

1. Sheer Magnitude – Absolute or great size/extent

2. Status Quo – The present situation or existing state of affairs

3. Bottomline – The fundamental thing or the most important factor

4. Leverage – Use something to its maximum advantage

5. Economies of scale – It is savings or cost advantage when the efficiencies of production increases

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Mergers are driven by synergies — in products, costs, business, geographies or technology and the most important, cost synergies. While there may be some geographical synergies between the banks being merged, unless they realise cost synergies through branch and staff rationalisation, the mergers may not mean much to them or to the economy. This is where the government’s strategy will be tested. It is no secret that public sector banks are overstaffed. There is also bound to be overlap in branch networks such as in the Canara-Syndicate Bank merger, especially in Karnataka and a couple of other southern States. Ditto with Punjab National Bank and Oriental Bank of Commerce, both of which have strong networks in the north and the west. The success of these mergers, therefore, will hinge on how well these banks handle the sensitive issue of staff rationalisation. The All India Bank Employees Association has already raised the red flag.

6. Synergies – Cooperation or when two or more than two entities come together to gain much more than what they gain individually.

7. Cost Synergies – Save on their costs

8. Rationalisation – Action of making a company or process more efficient

9. Ditto – Same to same

10. Hinge on – Depend on 

11. Raised red flag – Showed sign of danger/trouble ahead

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It was the Narasimham Committee in the late 1990s that recommended consolidation through a process of merging strong banks. The issue has been the proverbial bee in the bonnet of successive governments since then. What the committee also recommended was shutting down the weaker banks and not merging them with the strong ones as is being done now. But this is obviously not an option politically even for a government with a brute majority in Parliament. The biggest plus of the mergers is that they will create banks of scale — there are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand.

12. Consolidation – Combining of things into a single thing to make it more effective

13. Proverbial Bee in the Bonnet – The topic that is being talked about a lot

14. Brute – Very strong

15. Miniscule – Tiny or very small

16. Constricted – Restricted

17. Banks of Scale – Huge Banks

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Yet, this advantage of scale cannot be leveraged without adequate reforms in governance and management of these banks. To be sure, Ms. Sitharaman did announce a few measures to make managements better accountable to the board. But the key reforms to be made are at the board level, including in appointments, especially of government nominees. These are often political appointees, with little exposure to banking. Surely, such practices need to be curbed as the definition of global banks is not just about size but also professionalism in governance. The government will also have to manage the fallout of unleashing four mergers simultaneously which is bound to cause upheaval in the industry. Would it have been better if these mergers had been done one by one? The future will colour the past.

18. Curbed – to restrain or to limit something

19. Professionalism – Use of skill or competence or expertise

20. Fallout – Adverse Results 

21. Unleashing – Released

22. Bound to – destined to, definitely

23. Upheaval – Sudden change, Disruption, Initial trouble

24. The future will colour the past – If the future is good, it will give the confirmation that the decision made was right.

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This was all from us in this blog “The Hindu Editorial Analysis” on Bank Mergers. We hope that you like the contents of the blog and are able to benefit from it as well.