On Sept. 4, the heads of 10 large public sector banks met with the top management at Bank of Baroda. The agenda—understand what goes behind a complex merger process involving two or three public sector lenders.
On Aug. 31, the government abruptly announced that it will merge 10 public sector banks into four. It drew confidence from the merger of State Bank of India with its associate banks in 2017 and the consolidation of Bank of Baroda with Dena Bank and Vijaya Bank, announced in 2018.
Top executives of the 10 lenders who are preparing to begin the consolidation spent nearly the entire day at Bank of Baroda, leaving with the realisation that the process ahead was a long-drawn one.
The merger of Bank of Baroda with smaller peers Dena Bank and Vijaya Bank was itself announced exactly a year ago. In that time, a core team in-charge of the merger had dealt with issues ranging from re-organisation of employees to merging of IT systems. Most of these remain work-in-progress, while some other tasks such as a rationalisation of branches and ATMs are just beginning.
No VRS But Option To ‘Disassociate’
One of the first issues that the banks will deal with is reorganisation of employees.
Bank of Baroda’s employee base shot up to nearly 85,000 on April 1, as compared with 56,000 on March 31, owing to the merger. Since the government had promised that the mergers will not entail job losses, the merged lender has not been able to trim its workforce.
Instead, Dena Bank and Vijaya Bank offered an exit option to employees under a scheme to ‘disassociate’ from the lenders if they choose. Under the scheme, the employees would forego the remainder of their service periods and be paid pensions as per their existing pay scales. Unlike in a Voluntary Retirement Scheme, there would be no one-time payout.
About 250-260 employees from Dena Bank and Vijaya Bank opted for an exit using their right to disassociate from the bank, said a banker directly familiar with the matter, who spoke on condition of anonymity.
With few exits, the banks had to step up provisions for pensions.
Dena Bank and Vijaya Bank were assessing pension liabilities using mortality rates as assessed in 1993-94, while Bank of Baroda followed mortality rates based on 2011 data. To cure this, it was essential for both smaller banks to increase pension provisions, said the banker quoted above.
In the January-March quarter, Dena Bank made provisions worth Rs 1,040 crore for employee expenses, while Vijaya Bank made provisions worth Rs 885 crore. The respective provisions were at Rs 418 crore and Rs 481 crore in the April-June 2018 period.
We had a fair idea of the challenges as far as reshuffling employees goes, but the Bank of Baroda experience made us realise how deep these issues can be, said a Union Bank official who attended the meeting. It could be as simple as officers not getting a good enough office in their new posting, which can cause unnecessary disruption, the official said, while speaking on condition of anonymity.
Merging IT Systems: Easier Said Than Done
Bank of Baroda is also still to complete the IT integration across the three banks, even though work on this is in advanced stages.
While most public sector banks work on Infosys’ Finacle platform for their core banking operations, each bank has its own version of the platform, which is customised to its needs.
Bank of Baroda had been functioning on ‘Finacle 10’, while the other two banks worked on ‘Finacle 7’. Over the past year, Bank of Baroda has been working with Infosys to create a tool to merge the two systems.
According to the first banker quoted above, the tool is in the testing phase and is about two months away from being implemented. For now, Bank of Baroda is working with three separate core banking systems, where the data collated is merged in the data centres at the back-end.
In an emailed response, an official spokesperson for Bank of Baroda said that the bank had already flagged off a 12-18 month timeline for migration to a unified core banking system.
Infosys did not respond to an email on Wednesday.
According to a official from Punjab National Bank, who attended the meeting with Bank of Baroda, the problem of merging different versions of Finacle is likely to plague their merger with United Bank of India and Oriental Bank of Commerce as well. Both United Bank and OBC are on different versions of Finacle, this official said, adding that tools being developed for Bank of Baroda can be applied for their impending merger as well.
The Little, Big Things
Apart from big items like IT integration, Bank of Baroda continues to deal with a number of small issues.
Among them is identification of branches and ATMs that need to be closed due to overlaps. So far, 500 branches and ATMs have been identified. In total, about 1,000 branches and ATMs could be closed or merged when the consolidation is complete, the banker quoted above said.
A number of other customer facing issues have to be resolved.
Fresh Indian Financial System Code and Magnetic Ink Character Recognition codes have to be distributed among customers. Passbooks and cheque books have to be reprinted, branding has to be reworked.
At present, Bank of Baroda is about half-way through the process. While pass books and cheque books have been issued, fresh IFSC and MICR codes are yet to be issued, the banker quoted above said. Since the merger of the core banking systems is still under process, Bank of Baroda has taken special permission from the Reserve Bank of India to allow customers to continue using their old codes, the banker said.
The official spokesperson for Bank of Baroda confirmed that the bank had received permission to continue with the old IFSC and MICR codes, till further communication.
Customer integration might look like an obvious part of a merger, but it could take anywhere up to 24 months, said Anil Gupta, vice president and head of financial sector ratings at ICRA Ratings.
Each customer has to feel a seamless transition in mergers of this nature. Moreover, you have to change their cheque books, pass books, the banking products they use and align everything to the merged bank. It is a time consuming process,.Anil Gupta, Head - Financial Sector Ratings, ICRA
A Cautionary Tale
The continuing merger pains at Bank of Baroda, even a year after the consolidation process was initiated, is a cautionary tale to the 10 lenders who are in the process of formally initiating consolidation.
Lalitabh Shrivastava, assistant vice president for banking research at Sharekhan, said that PS Jayakumar, chief executive of Bank of Baroda, will likely spend the remainder of his term in completing merger-related work, rather than focusing on growing the bank’s balance sheet. Jayakumar had received a one-year extension on his term in October last year.
Likewise, the chief executives at the lenders being merged, too, will spend most of their time on the consolidation process.
According to Saswata Guha, director at Fitch Ratings India, a public sector bank merger could take up to 24 months to complete from the date of the balance sheets being merged. While growth could suffer during this period, the consolidation is not the sole reason behind this, he said. “Growth issues are mostly due to individual balance sheet issues and low capital base for these banks. However, the consolidation process is surely a distraction from the current issues plaguing the system,” Guha said.
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