Events
& Issues
New Delhi, 11 July 2018
Bank Mergers
CREATING POSITIVE SYNERGY?
By Dhurjati Mukherjee
The NDA Government’s
decision to merge State-run banks to reduce their losses appears so far to have
been taken rightly. The merger of its five subsidiaries with the State Bank of
India last year, creating a behemoth with assets of around $37 trillion, has,
helped strengthen the largest commercial bank. It goes without saying that
mergers, as being contemplated, would strengthen banks and cut down flabs and
create positive synergies.
While there is growing speculation of
Allahabad Bank being merged with Punjab National Bank, the Government is also toying
with the idea of merging four State-run banks --Bank of Baroda, Oriental Bank
of Commerce, Central Bank of India and IDBI Bank Ltd. The first merger is
justified on the ground that while Allahabad Bank is strong in the eastern
region, PNB is a leading bank in the northern region. If the other four State-run
banks are merged they would have combined assets worth Rs 16.58 trillion and are
expected to become a strong financial entity.
The reasoning behind
the Government’s proposed mergers is not only influenced by the SBI example but
that these will help State-run banks to reduce their bad loans and achieve
economies of scale as also operational efficiency. However, some experts are
not convinced and have differed on the possible benefits of the move. Former
PNB Chairman K C Chakravorty, cautioned that merging inefficient banks may not
necessarily help create all-round efficiency though productivity may increase a
little.
On the other hand, the
2014 committee report of PJ Nayak, former Chairman and CEO, Axis Bank, and
Former Country Head, Morgan Stanley India, which was constituted by the RBI, stated
the Government has to work towards reducing its liability to recapitalise
banks. It made a significant recommendation that either privatisation or
consolidation was possibly the only way out. Further, it suggested a phased
reform process that envisaged the Bank Boards’ Bureau as the first step
culminating in the creation of a Bank Investment Company, which holds all
government stakes and thereby, governs the public sector banks.
Privatisation to a limited
extent may be considered with management control, shared both by the government
and the private partner. But apprehensions have been raised in granting
majority share in the hands of private partner as it is doubtful whether, in
such a situation, the priority lending parameters would be taken care of.
One cannot deny the
fact that the Public Sector Undertaking banking sector is facing a critical
situation and there is need to revive and make the banks viable entities. Most
economists and bankers feel that merger is the first possible step in this
direction though, however, there is much more to be done in professionalising
the management.
There are experts who
are of the opinion that RBI’s involvement should be limited while these public
sector banks need to embrace higher levels of professionalism and adopt more
scientific techniques of decision making and due diligence checks. To start
with, the boards of these banks, instead of being filled with Ministry representatives
and officials, should have professionals with adequate industry experience. The
industry perspective is very important in taking a view of the bigger picture
while evaluating project proposals and then taking credit decisions.
The point regarding
granting more independence to banks has been discussed and debated by experts umpteen
number of times. However, independence, in the true sense of the term, without
interference by the political masters, may no doubt, be a welcome proposition,
but is it achievable? The government will need to be tough and at the same time
it is necessary to have strict monitoring, at the highest level, so that
bankers do not fall into a trap of dishonest businessmen, which the country is
now facing to deal with. In fact, granting of big loans needs to be decided
and/or sanctioned at the highest levels and responsibility fixed thereof for
non-payment.
As of now, it has been
noticed that by and large small businessmen do not necessarily default in
returning loans but it is the big corporates that do, on various accounts.
Sometimes the money may be diverted to other businesses within the group for
which the banks have to suffer. The growing demand that names of all big
defaulters be made public has unfortunately not yet been carried out. It is
high time this is done to check further defaulting forcing banks to burden
themselves with the non performing assets.
Meanwhile, in the
recently released RBI Financial Stability Report (FRS), it has been revealed
that the gross non performing asset (GNPA) ratio has risen from 11.6 per cent
in March this year from 1-0.2 per cent in September 2017. The ratio of NPAs advances
registered a smaller increase during the period due to increase in provisioning,
which has dented the bottom lines of several PSU banks.
However, there are
expectations that initiatives such as Insolvency and Bankruptcy Code (IBC) and
norms for prompt resolution of bad loans augur well for financial stability
despite short-term pain. This has been pointed out by RBI Deputy Governor Viral
Acharya: “At such a juncture, the government’s front-loaded recapitalisation
programme for the beleaguered PSB’s should impart robustness to the financial
sector as a whole”.
At the same time, there
should be no reason why a section of society, particularly the privileged,
should be allowed to corner valuable bank money and end up defaulting.
Professionalism is the need of the day and a message must be sent that bank
loans have to be returned even if it means selling the company’s properties and
other assets of the directors.
A turnaround may be
possible within two years or so and this is what the Government should strive
for. In fact, the FSR expressed confidence of coming out of the RBI’s Prompt
Corrective Action Framework by 2020, following a review by Parliament’s
Standing Committee on Finance.
The present
stagnation in lending operations could be eased if some of the bad loans are
recovered, for which all-out efforts are necessary. Moreover, a strict signal
would need to be sent by the banks that public money cannot be squandered and
if timely payment is not made, strict punishment shall be imposed on wilful
defaulters. It goes without saying, faith in the banking system needs to be
reposed and sooner the better. ---INFA
(Copyright, India
News & Feature Alliance)
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