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CREATING POSITIVE SYNERGY?

Bank Mergers

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 flab 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

 

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