Down­side

The Hindu Business Line - - FRONT PAGE - SUBIR ROY H VIBHU

An ar­chi­tec­ture has emerged for the Gov­ern­ment to tackle the mas­sive bad loan prob­lem of state-owned banks. There is now a Banks Board Bu­reau to pick new top man­agers for banks and act as a buf­fer be­tween banks and the Gov­ern­ment to en­sure proper gover­nance.

There is also an in­sol­vency and bank­ruptcy code which is a sin­gle le­gal win­dow, so to speak, to speed up the process for res­o­lu­tion of bad debts. Though these mea­sure will take time to show results, they can be termed the good part of the ar­chi­tec­ture.

The in­dif­fer­ent part is the Gov­ern­ment em­pow­er­ing it­self to ask the RBI to di­rect banks to ini­ti­ate pro­ceed­ings un­der the code and also form com­mit­tees to give banks di­rec­tions in this re­gard.

Since bank man­age­ments will move slowly on their own to re­solve bad debts for fear of fu­ture scru­tiny, this move makes sense but it also lays the ground for the gov­ern­ment to pick and choose be­tween bad debts and the pro­mot­ers be­hind them. So this can be termed the in­dif­fer­ent part of the ar­chi­tec­ture.

Merg­ing con­cerns

But where the Gov­ern­ment is go­ing con­spic­u­ously slow is in re­cap­i­tal­is­ing public sec­tor banks whose net worth is se­verely eroded. Wit­ness the mi­nus­cule ₹10,000 crore pro­vided for this in the lat­est bud­get when the NPA load goes into lakhs of crores.

In­stead, it has de­cided to move for­ward with the merger of banks, re­duc­ing their to­tal num­ber by al­most half to around a dozen. For this the gov­ern­ment has ap­proved a mech­a­nism which will both over­see and speed up things. This is the bad part of the ar­chi­tec­ture.

Merg­ers are be­ing touted as the way to have only big strong banks which will then have enough depth in their bal­ance sheets to take care of fu­ture pro­vi­sion­ing needs and also keep lend­ing big to achieve rapid eco­nomic growth. But by sim­ply merg­ing a weak bank with a strong bank you will merely cre­ate a big­ger bank which will be weaker than what it was in its ear­lier avatar.

We need go no fur­ther than to look at the im­me­di­ate fall­out of the merger of five as­so­ciate banks of the State Bank of In­dia with it­self. The as­so­ciate banks made a loss of ₹5,792 crore for the March quar­ter of 2016-17 and ₹10,243 crore for the en­tire year.

This re­sulted in the con­sol­i­dated net profit of SBI go­ing down to a mere ₹241 crore when the stand alone net profit was ₹10,484 crore. The con­sol­i­dated net profit will be a frac­tion of the outgo on ac­count of div­i­dend. Hence div­i­dend, which props up the gov­ern­ment’s fisc, will have to be paid out of re­serves.

The shock de­liv­ered by these num­ber caused the SBI share to tank by 4.6 per cent. Fi­nance min­is­ter Arun Jait­ley had ear­lier ex­pressed con­fi­dence that the merger would make the bank a global player!

Sys­temic risks

In fact, the ex­pe­ri­ence since the fi­nan­cial cri­sis of 2008 sug­gests that gov­ern­ments should have on their hands as small a num­ber of en­ti­ties as pos­si­ble which are too big to fail as they are sys­tem­i­cally im­por­tant.

This puts the re­spon­si­bil­ity over them ul­ti­mately in the hands of the reg­u­la­tor whose job it is to en­sure sys­temic sta­bil­ity.

On the other hand, it is small banks with strong lo­cal roots which lend to small and medium en­ter­prises with good knowl­edge of the world they op­er­ate in that have a lot go­ing for them­selves.

Through the small units and star­tups they fund, smaller banks are the cre­ators of jobs and wealth. In fact, in to­day’s world of bank­ing, it is the small that is beau­ti­ful be­cause they have their feet firmly planted in the ground and are thereby ro­bust on their own terms.

Merg­ing banks so as not to have to re­cap­i­talise them in a big way will merely post­pone the need to adopt a real so­lu­tion and prob­a­bly make things worse when it will not be pos­si­ble to hide any more be­hind stop­gap mea­sures.

The con­trast be­tween merg­ers based on the ba­sis of felt com­mer­cial needs as op­posed to sim­ply do­ing so in or­der to show that one is do­ing some­thing is il­lus­trated by the two stages which the State Bank of In­dia group has gone through. Ear­lier an as­so­ciate bank was merged with the par­ent when it was con­sid­ered to be weak.

This led to the merger of State Bank of Bikaner and Jaipur and State Bank of In­dore with the par­ent. But the sub­se­quent merger of the five re­main­ing as­so­ciate banks is a blan­ket ac­tion which is jus­ti­fied only on the ground that it is bet­ter to have fewer state owned banks than more. It is no won­der that post the mass merger, the merged en­tity is seen to be weaker than its ear­lier stand alone self.

Pro­fes­sional man­age­ment

If merger, per se, is not a so­lu­tion then what is? Ob­vi­ously, given the present dead weight of non-per­form­ing large cor­po­rate loans, there is a fu­ture for public sec­tor banks only if they are run by pro­fes­sional man­agers who can take a view on a project and other risks at stake be­fore mak­ing a com­mit­ment. On the other hand, what had hap­pened was po­lit­i­cally di­rected lend­ing for projects whose costs had some­times been gold plated (over­stated) and with in­ad­e­quate as­sess­ment and cov­er­age of the risks at stake.

Crony cap­i­tal­ism and public sec­tor bank bad debts are two sides of the same coin. Once the top man­agers cho­sen by the Banks Board Bu­reau set­tle down and start chang­ing the man­age­rial cul­ture, pro­fes­sion­al­ism can emerge in an am­bi­ence of im­proved gover­nance.

But that can hap­pen with­out merg­ers! The right pol­icy now would have been to sim­ply con­tinue chas­ing bad debts armed with the pow­ers con­ferred by the bank­ruptcy and in­sol­vency code and not en­gage in forced merg­ers. These are as du­bi­ous as forced mar­riages.

The writer is a se­nior jour­nal­ist

SBI’s net prof­its only went down af­ter the grand merger

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