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Bank mergers will not fix banking nor help the economy

By DM Deshpande

As far as PSU bank mergers go, the latest announcement by the government is by far the biggest consolidation exercise ever. Ten public sector banks are to be combined into four bringing down the total tally to 12. The process is to be completed in two years.

There is no denying that an economy of the size of India needs fewer banks. Our biggest banks are hardly comparable in size with global banking organizations. However, mergers by diktat aren’t the best method to achieve this result.

Creating globally strong banks is certainly desirable objective. The government’s role should be restricted to create conducive conditions where banks would grow and achieve scale. There is also an issue of moral hazard after the global financial crisis in 2008. Since then there is a question mark on very big banks that are ‘too big to fail’. While this is applicable to western nations, it is not such a glaring issue since even our combined entities tend to be quite small in comparison.

Normally in any case of merger or an acquisition, objectives are to achieve scales of economy, get a bigger market share and possibly gain some pricing freedom/leverage. None of these seem to be behind the proposed merger of PSU banks. If a strong entity takes over a smaller weaker firm, it may actually help lift the weaker organization. There is nothing wrong with the logic except that it has not happened in the mergers so far.

After the affiliates of SBI merged with SBI, bad loans actually grew higher in the combined entity. PNB, once the second largest bank is still grappling with worst ever Nirav Modi banking fraud. Forced mergers rarely work. In case of merger of Vijaya and Dena banks with Bank of Baroda, the alliance faced hurdles from day one. Weak finances of Dena after a year have again brought to the fore unresolved thorny issues of merger.  

The only rationale explanation for the mergers, though the same is not officially stated, seems to be reduce the financial burden of infusion of capital in to some of the public sector banks. Given that almost all PSU banks are hit by mounting NPA’s, it is not clear how the government will avoid recapitalizing them again and again. This certainly will not be the last time when the government will help banks to strengthen their capital base so that more credit starts flowing to industrial borrowers.

Some Rs.55,250 crore have been earmarked to infuse into combined entities. Considering the level of NPA’s it is hard to think how this will help to tide over the situation. The SBI alone would require Rs.15,000 crores to provide for bad loans alone according to ICRA, the affiliate of Moody’s Investor service. Obviously, no capital for growth will be left after massive merger plans.  And what will be the fate six of other PUS banks that are not a part of the proposed merger moves? They too have high NPA’s of over 20 per cent in certain cases.

The timing of the merger announcement is also questionable. The July GDP growth has trickled down to 5 per cent, the lowest in six years. With car makers reporting drop in sales, more pain is in store before one can see some light at the end of slow down tunnel. Imports too are falling for three months in succession. This is bound to hit the exports as well.

The integration of banking units does nothing to address these macro-economic problems. In fact, on the contrary it will worsen the problems for borrowers of infrastructure projects as banks will be busy with the process of integration.  Mergers are not real reforms in PSU banking. There are several governance issues that need urgent resolution. Banks do not have experience and expertise in long term lending. Lending to NBFC’s, mutual funds are all instances of shadow banking that have created crisis like situation. Government as the biggest stakeholder is seen to be a stumbling block in ushering these changes.   

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.

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