Mega Mergers of Banks And What They Won’t Solve

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On a once-busy highway, a clever dhaba-owner sat swatting flies, waiting for that rare trucker. Ever since they had built a bypass, his business had dropped sharply. He had some leftover aloo-gobhi in his fridge, there was some stale paneer masala and a pan of three-day-old dum aloo. Everything was in progressive stages of decay.

A solitary jeep came rolling down the road and stopped at the dhaba. The driver looked famished. The owner quickly fired up the stove. On one burner, he cooked two rotis. On the other, he mixed up all his left-over subzis adding a dollop of ghee. And, there it was. With a little garnish of chopped dhania, he had served up super-fresh Vegetable Korma with desi ghee ka parantha.

This is exactly what the merger of PSU banks is all about. They are all in progressive stages of NPA-driven decay. Merging them is supposed to turn them into a palatable dish for investors. And, the bank recapitalisation money is the desi ghee and dhania.

The plan is not new. It has been around since 1991 when the Narasimham Committee recommended merging PSU banks in a three-tiered structure by size. In 1993, there was a messy merger of the cash-strapped New Bank of India with Punjab National Bank. Former Finance Minister P Chidambaram was a great votary of bank mergers, ostensibly to give government banks a fighting chance to compete against foreign players. Two of SBI’s associate banks, the State Bank of Saurashtra and State Bank of Indore, were merged with the parent in the UPA years.

While the UPA drew up the plans for bigger mergers, it was the Modi government which implemented them. In 2017, SBI’s five associate banks and the Bharatiya Mahila Bank were merged with the parent. In April this year, Dena Bank and Vijaya Bank were merged with Bank of Baroda. And, now, a series of mega mergers have created four big government banks.

What is it that the government wants to achieve? Two key things – reducing bad loans and increasing lending activity. The first will give banks the confidence to lend and the second will hopefully revive investments in the economy. The mergers appear to have been done keeping two related banking ratios in mind. One is the percentage of bad loans (NPA ratio) and the other, the amount of cheap funds that banks can access for lending (CASA ratio).

The rest of it involves so-called economies of scale. Multi-state presence and thousands of branches are meant to streamline the operations of these merged government banks. Of course, economies of scale also mean taking a close look at costs to improve the financials of these banks.

The elephant in the room here is public sector bank employees. Will there be job losses? Or even if there isn’t any large-scale retrenchment, do these mergers mean that the rate of new hiring will drop sharply? Bank employees are worried about their jobs and the future of their career. That’s why the Bank Employees Federation of India (BEFI) has already called for a strike on Saturday evening. (Do they really work on Saturday evenings?)

Could the government have dealt with the bad loans crisis in some other way? Banks have to set aside some funds every time a loan goes bad. This is called ‘provisioning’ and it eats into a bank’s capital. So, being saddled with large amounts of bad loans has whittled away the capital of government-owned banks. The answer to this has been recapitalising them.

The central government had already given Rs. 2.46 lakh crore to recapitalise banks and is now releasing another Rs. 70,000 crore. The amounts haven’t made any big difference to the overall level of bad loans in the system. Even today, after dropping by about Rs. 75,000 crore, it is still at Rs. 7.9 lakh crore.

Part of the reason for this persisting problem of bad loans is that little has been done to force big borrowers to return the money they had taken. Another reason is that nothing has been done to remove external bottlenecks that hold back viable infrastructure projects.

What should have been done is to spend government money to provide more capital to state-owned banks. Along with that, the government should have taken over private projects and ensured they are operated viably by public sector companies. Don’t forget that the Supreme Court recently puts its trust in a government company, NBCC, to complete projects that a private player couldn’t finish.

Of course, spending more money would require either raising more revenue through taxes on those who can pay, or funding it through an enlarged fiscal deficit. Till now, this government hasn’t shown any inclination of taking on the ingrained fiscal fundamentalism in India’s public discourse. So, no one is holding their breath.

Ultimately, the merger of these public sector banks is meant to turn them into lean and mean giants – all muscle, no fat. It is another clear assertion that the state has abdicated its role in ensuring that finance flows in an equitable manner. It is a complete reversal of why banks were nationalised 50 years ago. The objective is to run government banks in the same way as private banks are – to just make profits.

It also signals that the government wants to gradually get out of this problematic process of ensuring credit to the poor. Jan Dhan notwithstanding, the Modi Sarkar appears to be setting the stage for privatizing some of India’s big public sector banks. A few sickly financial institutions will probably be maintained by the state to enable vote-winning cash transfers.

Bank recapitalisation and mergers are an attempt to clean up the mess created by excessive lending during the UPA years. It would be alright if the final goal was to increase public control over the country’s finances. The problem is that it might just end up being a way for government banks to first bail out rich private creditors and then be sold to big private players.