But is big-bang bank mergers a solution?
Issues could include something as simple as an internal hierarchical muddle to more direct and larger conflicts.
The scheduled amalgamation of public sector banks (PSBs) at this juncture poses a drastic change to India’s socioeconomic condition. It brings with it issues not only of cultural and managerial alterations, but also various financial conflicts, such as interse disputes between the banks that could affect lending as well as recovery.
Issues could include something as simple as an internal hierarchical muddle to more direct and larger conflicts like priority of charge on securities in cases of common stressed assets, and the different recovery process being followed by each bank.
A key reason for the merger is the weight of mounting bad loans over the years. While various laws have been brought in force to deal with such stressed assets, are these mergers an effective step to shed the weight of such bad loans?
The merger of public sector banks raises a considerable risk to the recovery process, which may differ from one bank to another. In the case of stressed assets, the creditors’ pool could be common, which may include several of the merged public sector banks while their hierarchy in the list of creditors would vary.
There can be situations where one bank may have taken a different stand from the other bank in relation to the same stressed asset, leading to inconsistent claims where conflict of interest will be evident. This could lead to prolonging the recovery process so as to resolve the situation — which, in turn, could be perceived as a threat by strategic investors.
Such operational problems arise as the merged entity would be represented as a joint entity. There may be a scenario in which the pending recovery action by Bank A will have to be continued by Bank B despite hurdles — or, in a common borrower case, under the insolvency process, if Bank A has objected to a resolution plan and Bank B has supported it. The impact may then have to be reviewed.
But this may be resolved if the merged entity were to adopt and develop an effective internal mechanism to resolve such conflicts in the ongoing recovery proceedings. This process could kick off by weighing the interests or claims of each bank entangled in such conflict and by balancing the pros and cons in the interest of the merged entity. Necessary steps to assess the risk and outcome of such situations are inevitable.
The merger will entail movement of staff, bringing about situations where, say, a different team, having conducted no forensics with respect to stressed accounts, is deployed leading to ineffective recovery steps. Forensics on non-performing asset (NPA) accounts often get lost during such a transition phase of amerger, especially when the latter happens to be of a large scale. The merged entity is also likely to face post-disbursement risks and detection of fraudulent accounts or transactions in this transition phase, not to mention staff accountability issues.
These can be resolved by issuing specific guidelines for maintaining proper documentation of each account, in a uniform manner across the banks prior to the merger.
It is necessary that resources be dedicated towards engaging competent teams to oversee and resolve issues arising out of such a transition phase.
The merger also raises the threat of differences in prioritisation, in which the factors for internal risk assessments based on the forensics can vary between the banks. This is more likely since the merging banks are almost at the same level, thereby increasing the possibility of a rift.
While non-performing assets and their resolution are one of the major factors for the merger, what remains to be seen is whether such an action really provides a solution. Whilst it may have played a crucial role for GoI to infuse funds into public sector banks, with the current economic conditions, one needs to wait and watch for actual benefits accruing.
(The writer is partner, IndusLaw)