By Snigdha Kalra
The Government of India, along with the Reserve Bank of India, has been working on a plan for consolidation of public sector banks (PSBs) in India for a while now, hoping to bring the number of the banks down from 21 to 12. Basking in the success of the merger of the State Bank of India (SBI) with 5 associate banks and Bharatiya Mahila Bank, it has now accelerated its efforts to ensure the success of this strategy, which will result in the creation of large PSBs and increase competition in the banking sector.
Why, then, are other banks opposing this endeavour of the government? And what will be the impact if this plan becomes a success?
Why consolidation is the way ahead
According to the government, consolidation of public sector banks will help create economies of scale. It will also help improve their efficiency, diversify risks and increase profitability. The most recent merger of SBI can be seen as a precedent. With this merger, SBI has entered the league of Top 50 global banks in terms of assets. No other Indian bank has been on the list before. After the merger, SBI Chairman Arundhati Bhattacharya said, The combined entity will enhance the productivity, mitigate geographical risks, increase operational efficiency and drive synergies across multiple dimensions while ensuring increased levels of customer delight.”
The impact does not stop at the banks involved. The merger is also set to help the customers of the bank. SBI clearly has a competitive advantage in the banking sector, and with the merger of six other banks, their customers also stand to benefit. According to Bhattacharya, the borrowers will have to pay lower rates of interest as SBIs interest rates are, on an average, lower than those of other banks.
According to Dena Bank CMD Ashwani Kumar, the consolidation would help banks manage the current NPA crisis by managing capital requirements. According to RBI Governor Urjit Patel, the fewer yet healthier banks created by these mergers will allow them to deal with stressed assets better. Thus, consolidation will improve the long-term financial health of the banking sector. However, it will come at a short-term cost.
The case against consolidation
Banks suffering from dire bad loan problems are not very keen on getting on board the governments project of PSB consolidation. The NPA crisis has shown very small signs of improvement, even with the implementation of the Insolvency and Bankruptcy Code (IBC). As a result, banks are not too happy with the merger plans that the government and RBI are fathoming. With the adverse profit and loss situation that these banks are suffering from, they would clearly not want to take on the burden of other such banks’ losses and bad assets. Moreover, the provision of 50% bad assets that the banks need to maintain if they refer a company for resolution under the IBC, has only resulted in putting the banks in an even more disadvantageous position. Either they suffer the losses due to bad assets, or they keep a provision which reduces the amount available for lending.
Under such conditions, the larger PSBs like PNB and Canara Bank have put forth some conditions that need to be fulfilled before acquiring smaller banks. They say that the bank they are to acquire must be making profits. Moreover, they want a three-year term for the management to ensure a smooth transition. Additionally, they ask for the government to contribute capital to the bank.
Clearly, these conditions are aimed at ensuring that the already troubled banks do not suffer even more financial burden after the merger. However, these conditions will prove to be a setback for the governments aim, since most of the PSBs are currently suffering losses.
Other alternatives
International experience shows a history of bank mergers gone wrong, the most recent one being just before the 2008 financial crisis. The largest and strongest of banks also face risks of going bankrupt. If anything, a larger bank poses an even higher risk of failure, especially in such volatile financial conditions as exist in India today. Bank mergers are not the need of the hour. Instead, the focus of the government needs to be on increasing competition, reducing bad loan troubles in the banking sector to make it stronger and more stable, and prevent another crisis. Thus, bank consolidation may not be the golden key that it’s being heralded as.
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