India Today - - UPFRONT - —M.G. Arun

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.

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