BIG MERGER, SMALL GAINS
Finance minister Arun Jaitley believes the merger of three public sector banks—Bank of Baroda, Vijaya Bank and Dena Bank— will create a strong entity and boost the weakest among them (Dena Bank), but not everyone is convinced. According to him, the government did not favour a merger of weak banks, and so came up with the idea of merging two strong banks with a weak one to create India’s third largest bank with a total business of Rs 14.82 lakh crore.
Dena Bank is one of the 11 public sector banks put under the Prompt Corrective Action (PCA) framework of the Reserve Bank of India (RBI). Banks are put under PCA when they breach key regulatory requirements relating to capital adequacy ratio (a measure of a bank’s available capital expressed as a percentage of its credit exposures), return on assets and non-performing assets (NPAs). Banks under PCA are restricted from issuing fresh loans, expanding branches or recruiting more staff. In April last year, five of the State Bank of India’s subsidiaries were merged into the parent bank.
The concern for some experts is that the present merger changes nothing—capital, net worth or assets of the banks. Although the combined numbers look impressive, they do precious little to improve the overall performance of these banks. “The banks will continue to be under government ownership and become channels to roll out government schemes. There will be no change in the way they function,” says Madan Sabnavis, chief economist with Care Ratings. “In the end, what we have is a horizontal summation of balance sheets. That is a very short-term solution to addressing the problems of state-owned banks.” Although Dena Bank has a net NPA ratio of over 11 per cent, the combined net NPA ratio would be at 5.71 per cent, making it look healthier.
There are no larger benefits of synergies being discussed nor any clear plans to cut costs highlighted. Instead, the government has assured bank employees of no job cuts post-merger. The merger comes at a time when public sector banks are straddled with bad loans to the tune of around Rs 9 lakh crore as on March 2018.
The Narendra Modi government has been advocating consolidation of the public sector banking space. While experts have long mooted the concept of fewer, larger banks, some have warned that mergers for the sake of size will only sweep the muck under the carpet. Former RBI governor Raghuram Rajan said in September last year that public sector bank mergers should be done only after the balance sheets have been cleaned up. “I would say restore the banks to health, get an active board composed of professionals. There has been a steady attempt to professionalise banks and remove political hacks. Once we have done that, I think there will be an ideal situation for merger,” he said.
The All India Bank Employees’ Association has said there is no evidence that mergers strengthen banks or bring efficiency. Some argue that the merger will reduce the capital burden for the government over the long term and enable better management of a smaller set of large nationalised banks.
With fewer such banks, capital allocation, performance milestones and monitoring will become easier. Krishnan Sitaraman, senior director, Crisil Ratings, says: “Such consolidation will engender economies of scale and can structurally improve operating efficiencies and governance. It will also help the merged entity to participate in credit growth opportunities and defend turf.” In the past five years, public sector banks have ceded around 10 per cent market share of banking assets to private banks, and could lose another 10 per cent over the next three years if capital constraints continue, adds Sitaraman. Arresting this would be crucial, but the big question is whether such mergers alone will help.