Look be­yond bank con­sol­i­da­tion

The Pak Banker - - OPINION - Ta­mal Bandy­opad­hyay

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.

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