How To Make Public Sector Bank Mergers Work

Corporate transformation works as a triumvirate: strategy, capabilities, and culture. The last is the most difficult piece.

Source: BloombergQuint
Source: BloombergQuint

This column has been republished after the announcement of the Bank of Baroda - Vijaya Bank - Dena Bank merger ratio.

After decades of speculation about consolidation of public sector banks initially suggested by Narasimhan Committee in 1991, and later by the Nayak Committee in 2014, the jury is out and the government has proposed an amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank. The usual benefits of such an amalgamation have been reiterated. The main argument is that it will provide the global size, higher lending ability, operational efficiency, improved customer service, better synergies etc. The real challenge is, how? Public sector banks, with a few exceptions, have generally shown little innovations in product offerings, have a mediocre level of customer service and a cosmetic orientation to human resources and culture building.

Studies show that 70-90 percent of mergers fail on account of human resources and culture issues.

It is a worrying reality that the state of HR and culture building does not receive priority attention at any level. The government appointed a committee under my chairmanship in 2009 to study the state of HR in PSBs and suggest reforms, which is now popularly known as the Khandelwal Committee. Given the prevailing reality of HR and lack of efforts in building succession for critical positions, the committee advised caution about the impending risk on account of HR.

Nearly a decade later, the situation is more or less the same, with some improvements here and there.

Focused attention and consistent initiatives by the boards and chief executive officers to take long-term steps are few and far between. The two main recommendations of the committee were:

  • Setting up of a board-level committee on HR, and
  • Creation of a third position of Executive Director for HR

These, while implemented, have made no difference. Most HR committees are defunct, as they rarely meet. When they do, they seldom discuss strategic issues of building talent. The third position of ED is being largely utilised for operational issues.

So, the amalgamated entity’s first task will be to focus on HR as the major challenge.

The HR To-Do List

  • The merged bank needs to undertake a detailed HR due diligence, conduct a talent audit, address productivity issues, and gauge leadership bench-strength.
  • As the banks integrate, the different performance management systems, recruitment and promotion processes will have to be optimised.
  • The union-management relationship in the new entity will need to be studied, along with the arrangement for structured meetings, and processes for grievance handling from employees.
One of the key challenges for the new entity would be to devise a pattern for new forms of interaction between the staff union and management.

It may be pertinent to mention that Bank of Baroda workmen union and officers’ organisations are different from the majority of organisations in the industry. What arrangement will be worked out to manage this new reality is an important matter that cannot be brushed aside.

The main HR issue will be to build the morale of the workforce from two smaller entities and deal with their problems with empathy.
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Culture Issues

The management guru, Peter Drucker, famously said, “Culture eats strategy for breakfast”. Culture is an equal player with strategy and performance. Culture can be a competitive advantage.

There is powerful triumvirate in corporate transformation: strategy, capabilities, and culture. Culture is the most difficult piece in the integration process.

The steering committee of the integration process will have to undertake a culture audit of individual banks regarding leadership styles, responsiveness towards staff and customers, business culture, innovation-versus-aping, teamwork-versus-working-solo, and compliance culture. They will have to study this and decide what the best way forward would be for a modern and digital bank. This massive task cannot be ignored.

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Branch Rationalisation

One of the biggest challenges would be the rationalisation of branches, especially in Gujarat, the stronghold of Bank of Baroda and Dena Bank.

Dena Bank and Bank of Baroda together have over 1,600 branches in Gujarat, and Vijaya Bank has around 120.

A major rationalisation exercise is required with these branches in Gujarat, for operational efficiency and cost management. There will also be a major rationalisation of administrative offices in various states and head offices. The combined entity will let go of surplus staff. As a part of the amalgamation process, a window for a voluntary retirement scheme should also be made available. SBI has done it successfully recently.

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Technology Challenges

Like HR, technology holds the key to successful implementation of the amalgamation process. A very smart and competent team of professionals will be required to create seamless integration without much interruption of customer service.

Although these three banks share a common technology platform, the merger induces business uncertainty (which product and processes will continue, focus areas, etc.) and a freeze in decision making.

Every bank will have some IT project in progress. Amalgamation will dramatically expand operating complexity without any upfront synergies, as the current maturity level of banks is fairly low (fragmented vendor landscape, a multitude of small applications, lack of a common layered architecture, etc.)

There are added expectations—almost immediately there are multiple data requirements on the financials, regulatory compliance and reporting, due diligence, etc.—combined with a requirement to migrate all existing experience to the to-be-combined brand.

The lack of a data dictionary and good reporting capabilities make it hard to build combined views and lead to the “shifting view of truth” as data is discovered.

Bank of Baroda is understood to be in the process of making a big investment in creating a data lake, and its IT department should leverage this data lake investment, to bring together all the data across the three entities, to create superior analytics for the combined entity. This would offer insights to the bank’s leadership on designing the future of the merged entity.

The Brand

As of now, it is not clear what the name of the new entity will be. This is usually a crucial issue for investors. Customers too engage with a bank at an emotional level. The amalgamated entity needs this issue resolved dispassionately.

Without getting into the semantics of whether this is an amalgamation or a merger, or viewing this emotionally, it will be in the interest of the new entity to retain the well-known, 110-year-old, Bank of Baroda brand.

Rebuilding brand equity with a new name will be a massive exercise with uncertain results.

A New Organisational Design

The merged entity will require a new organisational design to cope with the future business projections possibly akin to SBI, with suitable legislative changes.

The historian Alfred D. Chandler Jr.’s principle that ‘structure follows strategy’ is a truism, and it is appropriate that a new structure facilitates the strategy of creating a global size bank— efficient and meeting the aspiration of modern India. But, it is not clear as to who will lead this change. Will, the government, lead the change or will the larger bank in the merger, in this case, Bank of Baroda, lead this change?

A clash of egos between the three banks can stonewall the process of change.

The solution is to create a steering committee with the managing directors of the three banks with the MD of the largest bank being the convenor.

In the event of differences, the Finance Ministry needs to offer a high-power escalation mechanism. The normal bureaucratic channels, on such a crucial matter, might impede the process of amalgamation.

If this deal has to be a showpiece amalgamation which can inspire further consolidation, it needs to receive the highest priority of the government in sorting out the issues.

Among the major tasks of the government will be to identify the leader of the team, find new roles for surplus MDs and EDs, take steps to identify outstanding board members for the new entity and allow flexibility to the new bank for new organisational design.

The new entity cannot be managed with the old architecture, and service conditions.

The fall in the value of Bank of Baroda and Vijaya Bank’s shares since the announcement by the government is indicative of the prevailing pessimism about the success of this amalgamation. Pulling it off, and setting the tone for future mergers, requires a massive effort and new thinking by the government.

This consolidation effort will require strong leadership of the combined entity, with proven skills in building intangibles like an ecosystem for HR, culture building, strong governance, leadership development, and navigational skills. It will also require a team of outstanding bankers, both from inside and outside to pilot these changes. It must be recognised that the task is much more complex than the mere assimilation of balance sheets.

Anil K Khandelwal is a former chairman and managing director of Bank of Baroda and Dena Bank. He was a member of the Bank Boards Bureau, and also chaired a Government of India-appointed committee on the overhaul of HR practices in public sector banks. He is the author of ‘Dare to Lead’ which documents the modernisation of Bank of Baroda.

The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.