Look beyond bank consolidation
THE second edition of Gyan Sangam-a forum of bankers, regulators and policymakers created by the government to brainstorm critical issues that have been plaguing the banking sectorwas a relatively tame affair. Bulging non-performing assets or NPAs of the state-owned banks, recovery of bad loans, reforms in terms of giving the bank employees ownership in the form of stock options and consolidation dominated the discussions.
At the end of it, on Saturday, finance minister Arun Jaitley reiterated the government's commitment to bank consolidation. He wants fewer strong banks than many weak banks. A committee will be set up to examine the feasibility of bank consolidation.
Consolidation is something that the government as well as the Reserve Bank of India (RBI) have been talking about for years now. In fact, around the time former finance minister Pranab Mukherjee announced the opening up of the banking sector for private entities in his 2010 budget, then RBI governor D. Subbarao was pushing for the consolidation of banks. The sector was opened up and applications were sought to set up new banks because India was hugely unbanked with only one-third of the adult population having access to formal banking services. Since then, two new universal banks have come up and conditional licences have been given to 10 small finance banks and 11 payments banks. Also, the Pradhan Mantri Jan Dhan Yojana (PMJDY)-a national mission on financial inclusion-has opened some 221.1 million new bank accounts.
The apparent success of PMJDY has probably once again shifted the focus on consolidation-we don't need too many banks as a larger portion of India's population has now come under the banking fold. The emphasis is on having stronger banks that can support the investment needs of corporations and economic growth. How does one go about it? Should the relatively stronger banks take over weak banks? Can some of the weak banks in different geographies be bundled up? There is no easy answer.
In the December quarter, the pack of 24 public sector banks collectively posted a loss of Rs.10,912 crore with half of them in the red. Rising NPAs forced them to set aside dollops of money and that led to the losses. In the three months ended 31 December, their gross NPAs rose by about Rs.1.3 trillion to Rs.3.93 trillion. After provisions, the state-run banks now account for more than 90% of Rs.2.5 trillion net NPAs of listed Indian banks.
If we take a close look at the balance sheets of the state-owned banks, we can classify them into three categories. In the first set, there will be State Bank of India, Bank of Baroda, Union Bank of India and a few other relatively small banks with not-so-bad numbers such as Indian Bank, Syndicate Bank, Vijaya Bank, etc. The second set of banks is in a far worse shape. Bank of India, Indian Overseas Bank, Central Bank, IDBI Bank Ltd, United Bank of India, Uco Bank and a few others belong to this category. Finally, there are a few banks, including Punjab National Bank, that are not in a healthy state at all, but they have an inherent strength to overcome the problems of bad assets and bounce back. To be sure, all are majority owned by the government and none will fail-hence depositors' money is safe with each of them.
India has its history of bank failures, but that's in the distant past. In 1930, there were 1,258 banks registered under the Indian Companies Act, including loan companies and the so-called nidhis, which were in the business of borrowing and lending money only among their members even as they issued pass books and cheque books. By 1947, the year of Independence, the number of scheduled banks reduced to 82. The partition of the country dealt a blow to the banking industry and West Bengal bore the brunt. Of the 38 banks that failed in 1947, 17 were in West Bengal. Till 1960s, many more banks went belly up because of greed, corruption and lack of regulation.
Since economic liberalization, barring a handful of cooperative banks, no bank has been allowed to fail. Each time cracks surfaced in a bank's balance sheet, RBI threw a protective ring around it and 'found' a suitor for it with the sole objective of protecting the interest of depositors and avoiding any systemic crisis that could have been caused by a bank failure.