But as things stand today, translating that theory into practice isn’t straight-forward. There are synergies and areas of overlap between public sector banks, but mergers between them won’t be easy, as the Banking Regulation Act will have to be amended, which the Left is unlikely to allow. For now, the best these banks can do is forge Corporation-Indian-OBC kind of alliances.

An inability to do right to the business is one of the reasons why public sector banks, despite keeping pace on the growth front in the last five years, are the least valued among back stocks. Legacy issues is the other, though public sector banks have made huge advances, by relative standards. They have used treasury profits to reduce their bad debts to below 5 per cent of advances. They have computerised branches and are matching private players in rolling out ATMs. Yet, analysts say, public sector banks are still playing catch up. Says Kuwelkar: “They have to improve their competitiveness. You have to offer the best products. With their global expertise, foreign banks could take away the best of clients.”

Till the government waves the green flag for public sector bank mergers, it’s unlikely they will get the premium the market hands out to new private banks, who are more efficient and more insulated from economic cycles. Over a five-year period, for example, listed public sector banks have done well, benefiting from the pick up in credit and the fall in interest rates. But over a three-year period, when banks have felt the heat from rising interest rates, it’s the new private banks, with their greater retail-orientation and higher fee-based income, who have done better (See graphic).

... contd.