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View: Why India's mega bank mergers move may not yield the desired results

Government’s forced mega merger of public sector banks could scupper economic recovery.

, ET Bureau|
Updated: Sep 02, 2019, 05.01 PM IST
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I am not saying we maintain a Panglossian countenance, that we smile away every difficulty. But, in any real economy, the mood is very important,’ observed Reserve Bank of India governor Shaktikanta Das, speaking at an event in Mumbai late August. Sound advice. Sentiment matters. Irrational despondency can be as damaging for the economy as ‘irrational exuberance’.

But even the best Pollyannas will find it difficult to smile in the face of fresh evidence from the Central Statistics Office (CSO) that the economy is in deeper trouble than GoI has cared (dared?) to admit so far — GDP grew by just 5%, a 25-quarter low, during Q1 2019-20. The last time growth slipped to a comparable low was in Q1 2013, when the UPA government under Manmohan Singh was battling charges of ‘policy paralysis’ following the Comptroller and Auditor General (CAG) report on the coal block scam. Afar from flattering comparison.

Who Moved My News?
But whether by design or fortuitously, GoI was saved the blushes. Thanks to finance minister Nirmala Sitharaman’s announcement of a mega merger of public sector banks (PSBs), media attention was diverted from dismal growth numbers to bank mergers. Despite the fact that the proposal may have had merit when it was mooted by the Narasimham Committee 27 years ago, it is no longer regarded as the final word on the ideal size of banks. Indeed, one of the biggest learnings from the 2007-08 global financial crisis is that large banks could pose systemic risks that endanger the entire economy. On the contrary, small is beautiful.

That may not gel with the image of a muscular government. But whatever the reason, after the shotgun weddings brokered by the finance ministry, the number of PSBs will shrink dramatically: from 18 as on date (27 in 2017) to around dozen. But as with all mergers, especially those that are board-driven only in name, the cost-benefit trade-offs are far from obvious. The benefits are highly questionable. But the pain and cost are real, and are likely to prove enduring. Ask any Punjab National Bank (PNB) official who lived through the trauma of its merger with New Bank of India back in 1993. Despite the ‘common’ culture of the two Delhi-based banks, it took years for PNB to recover from the ill-effects of being a reluctant suitor.

Even if one is willing, for the sake of argument, to give the benefit of the doubt to the business rationale of the mergers, there’s no getting away from the nagging sense that the timing is most unfortunate. At a time when PSBs across the board should be focusing on revival of bank lending and recovery of bad loans — remember the Insolvency and Bankruptcy Code (IBC) process is yet to stabilise — PSB managements accounting for close to 82% of PSB business and 56% of all bank business will, instead, be engaged in trying to see mergers through.

Tackling a New NPA
Take the merger between Chennai based Indian Bank and Kolkata-based Allahabad Bank. It is a no-brainer that much of management bandwidth in the next few years will be spent trying to make the merger work. True, bank unions are no longer the force they once were, but even so. Caught between outraged cries of ‘Cholbe na!’ (Won’t allow this!) in Allahabad Bank and ‘Muddiya du’ (Cannot be done) in Indian Bank, senior management of the merged entity will have its hands full. Meanwhile, the more important business of banking will take a back seat. As with the similarly illtimed demonetisation, recovery will suffer a setback.

Unfortunately, GoI seems to be blind to the risks. The need of the hour is higher credit growth. Upfront recapitalisation of PSBs to the tune of Rs 55,000 crore (out of Rs 70,000 crore promised in the Budget) would have spurred credit growth with multiplier benefits for investment and growth. But that’s not going to happen if the bulk of the PSB universe is grappling with existential angst. Consequently, even though Sitharaman has largely delivered on her promise to front-load capital infusion into PSBs to ‘nudge an additional lending of Rs 5 lakh crore’, this is unlikely to happen. At a time when Q1 GDP numbers clearly show we don’t have any time to lose, this is akin to shooting ourselves in the foot.

Economists might argue it is important to first analyse the nature of the slowdown — whether it is cyclical or structural, since that will decide the policy response. But it is difficult to disentangle cyclical from structural factors, and as the slowdown continues and reports of job losses become a daily phenomenon, academics must take a back seat. As Deng Xiaoping, noted for opening up the Chinese economy, had famously said, ‘It doesn’t matter if the cat is black or white as long as it catches mice.’

What is clear is that when gross fixed capital formation has been falling quarter on quarter, and the private sector is shy of investing, there is no alternative but for GoI to invest. Ideally by reorienting expenditure towards capital, rather than revenue expenditure. But if that is not possible, by easing up on the fiscal deficit target. And in a bank-oriented economy, by allowing PSBs to support growth by not pushing pointless bank mergers.

Also Read

PSU bank mergers: The sting of the scorpion

But is big-bang bank mergers a solution?

View: PSU bank mergers road to somewhere, but not reforms

PSU bank mergers: Is it actually good news for shareholders?

View: Bank mergers are no silver bullet for India

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