India nationalised banks in 1969 with the express objective of
removing the concentration of control from the hands of a few. Besides,
as the then Prime Minister Indira Gandhi put it, nationalization
intended to give a “professional bent to bank management” and to
“encourage a new class of entrepreneurs.”
Some of these goals were achieved. As the newly-nationalised banks
were forced to open branches in remote areas, India’s savings and
investment rate rose steeply from 13 per cent to 23 per cent of the GDP.
Higher investment feeds into growth. The number of PSB branches
multiplied tenfold — from about 8,000 in 1969, to about 87,000 today. In
1969, a public sector bank branch covered an average population of
about 70,000. That figure has now come down to about 13,000. The Reserve
Bank of India (RBI) first opened up the banking sector to private
participation in 1993 when HDFC Bank, ICICI Bank and UTI Bank (now Axis)
were set up adding technology, efficiency and a touch of glamour to the
banking sector. Through the new banks RBI wanted to infuse competition
and raise efficiency and productivity.
It did have the desired impact. However, the transition from thick
dog-eared “ledger” book dominated PSBs to digital financial companies,
like the branch in Noida, hasn’t been without pain. The management at
public sector banks had to overcome stiff resistance from workers’
unions to push through computerisation, essential to hold on to ground
in the wake of new players like ICICI Bank and HDFC Bank. Strikes were
more commonplace amid a lurking fear of large scale layoffs. Machines,
it was argued, would make many jobs redundant endangering the livelihood
of thousands of families. For the 27 state-owned banks, it has been a
steeple chase of sorts. Having more or less surmounted the tech battle,
they have now walked into a war for capital. The non-performing assets
(NPA), loans that have turned bad, have crossed Rs 4.3 lakh crore during
the quarter-ended December 31, 2015. Besides, public sector banks are
in dire need of more funds to meet the new capital adequacy norms under
the global Basel III standards.
The move to amalgamate some of the two dozen banks into six large
institutions is part of the government’s road map to adequately bolster
the state-owned banks’ capital base. This is aimed at keeping the credit
tap open for genuine businesses while ensuring that economic growth
does not suffer. “You need strong banks rather than numerically large
numbers,” Jaitley said after a recent two-day annual brainstorming event
of industry leaders and officials from the RBI and the finance ministry
in Gurgaon. What happens when you pool the individual savings of each
member of a household? The figure looks large and formidable. If one
individual slips into a crisis, the combined savings will take care of
him and his dependents. Ditto for banks. Merging weaker banks with stronger ones will erect a protective ring for depositors and shareholders.
Since 1991, apart from a few cooperative banks, authorities have
never allowed banks to fail. The government and the RBI oversaw the
erstwhile Global Trust Bank’s takeover by Delhi-based state-owned
Oriental Bank of Commerce. In 1993, New Bank of India was merged with
Punjab National Bank (PNB), in a government initiated move to protect
depositors’ interest. This was the last time a public sector bank merged with another. Likewise, Bank of Rajasthan Ltd was merged with ICICI Bank Ltd, in a process overseen by the regulator.
Mergers will also allow Indian banks to catch up with global peers.
India’s largest lender SBI does not feature in the top 50 banks in the
global ranking. According to a Forbes study, in 2015, four Chinese banks
were listed among the top 25 lenders globally based on their profits,
asset size and market value. The Industrial and Commercial Bank of China
with a total asset base of $3,322 billion leads the pack. SBI, with an
asset size of ` 20,48,080 crore or $310 billion is dwarfed in
comparison. “We want good large banks to merge with each other and this
has to happen,” said Ashvin Parekh, managing partner, Ashvin Parekh
Advisory Services, a Mumbai-based financial advisory firm.
Win Some, Risk Some
Like all marriages, bank mergers too will call for necessary
adjustments. For customers, the shared infrastructure will come as a big
plus. For instance, there will be no cross-bank ATM usage fees between
the merged banks. “Withdrawal of money from another bank ATM is often
charged. This is something that should be changed,” said Meenu Sachdeva,
a school teacher from east Delhi. Most of these public sector banks
have local characteristics. For instance, the Indian Bank’s reach in the
country’s southern region is far greater than that of a north-India
headquartered bank. Mergers will allow customers use of the network.
“Customer service interface will further improve to be best-in-class and
this will help both depositors and borrowers,” said Saugata
Bhattacharya, chief economist, Axis Bank.
What about interest rates? It is too early to say, but a combined
entity will have more cash in hand. Logically, this should help in
keeping borrowing rates low since the cash is likely to be lent out to
individuals and companies, instead of being kept idle in the reserves.
An opposing strand of thought, however, cautions that a few large
inter-linked banks expose the broader economy to greater financial
risks. The stunning collapse of Wall Street icons such as Lehman
Brothers in 2008 exemplifies this argument. “Regulators should avoid
helping the big banks to get bigger,” said a 2013 paper entitled “Big
Banks and Macroeconomic Outcomes,” published on VOXEU.Org, the policy
portal of Centre for Economic Policy Research, a network of over 500
researchers throughout Europe, researching a variety of macroeconomic
topics, that hosts commentary by leading economists. Human resource
issues like regional allegiances, ensuring employees fit in with the new
culture, and chalking out a career path for them in the merged banks
all need to be handled with care. Intra-organisation growth is generally
quicker in a smaller company. A merger could hurt career prospects of
those working in smaller banks. “Why is the focus on mergers at a time
when the government should have put all its thrust on the recovery of
loans?” Questioned CH Venkatachalam, general secretary, All India Bank
Employees’ Association.
As of now, the government seems committed to fusing these
institutions. “This will improve the efficiency and service delivery of
the public sector banks,” said Shaktikanta Das, secretary, department of
economic affairs. Experts, however, warn against a hurried
implementation. The Air India and Indian Airlines marriage has still not
settled down. Authorities can learn a few lessons from that experience.
“The merger exercise will be a success only when it is a conscious
business decision,” said Soumya Kanti Ghosh, chief economic adviser,
SBI.
An alliance for the sake of just staying together may not necessarily lead to lasting matrimony.
WHAT’S GOOD
Shared infrastructure will give customers a wider use of the ATM
network; charges on cross-bank ATM usage would reduce considerably
Customers of smaller banks will get access to wider use of financial
instruments like mutual funds and insurance products that most big banks
offer
Large banks would have a wider capital base enabling them to offer
big ticket loans on their own without being part of a consortium
WHAT’S NOT GOOD
Many smaller banks will lose local characteristics, which customers preferred because of cultural affinity
A few large inter-linked banks increases the risk of a systemic
trigger like the one seen during the 2008 financial crisis that pushed
the world economy into a tailspin
Human resource issues can be ticklish; career growth of senior management and other workers could become knotty
No comments:
Post a Comment