On Mega-Mergers, and more

Finance Minister Nirmala Sitharaman’s decision to push for the merger of ten of India’s largest public sector banking units into just four, is both a news to cheer about and a cause of worry. The good news lies in the fact that the efforts are being made to contain the structural rot which had set in across the tardy-moving governmental lines of yore. The bad news is however, quite unsavoury: unless the mega-merger achieves the objectives of cost synergy and finds the middle ground on staff rationalisation, Indian banking’s mega-merger may turn out to be yet another incident comparable to the rather infamous demonetisation phase, without any fruitful gain.

Sitharaman’s view that merging several smaller banks into larger entities stems from the belief that such a move would lead to greater credit-lending capacity and reduce operational costs of lending. This would help create ‘banks-of-scale’, which can leverage a behemoth balance sheet size to serve the needs of an aspiring $5-trillion economy by 2025. The largest of the proposed mergers is the PNB-United Bank-Oriental Bank of Commerce. The amalgamation of Indian banking’s veteran triad would expectedly lead to a net business worth of ₹18 lakh crore, and would thereby right away become the second largest banking network (after the State Bank) in India with a total of 11,437 branches. Canara and Syndicate Bank, once integrated, will render it as the fourth-largest network in India with a potential to cut operational costs heavily due to network overlapping. The last of the mergers, that of the Union Bank of India with the Andhra and Corporation Bank, would enable the coalesced firm to increase the post-merger bank business by a basal factor of two at the very least.

The idea to consolidate the collapsing public sector banking system, plagued by overwhelmingly crippling amounts of NPAs and further accentuated by a lackadaisical staff culture, is not new. The Narasimham Committee in 1990 had recommended a vision similar to that shared by the government to prop up credit-availability and boost the otherwise flailing sector. The Committee had also recommended that it would be prudent to shut down weak banks instead of merging them with stronger ones; but this has never been a politically viable option for any government at the Centre.

Some may argue about the FM’s timing with respect to the sudden need for the introduction of the bank merger proposals. While the government has been a painting a glossy portrait of the economy by cherry-picking data, all is clearly not well. Economic parameters have been telling an alternative story from the government’s propaganda of an economic blossom, revealing the pitiable state that the Indian economy has got itself into. The government’s own admission that the growth in GDP for the first quarter of 2019 has come down to 5%, the lowest in a span of eight years, is only pointer to the riddle at large. The stagnation had set in from last year, with a vicious cycle of falling private investments and job cuts threatening to eat away the precious balance in the delicately organised and inter-dependent sectors. When the investments falls over a consistent period, along with a decline in job growth and opportunities, private players tend to take decisions that remain mostly under the hood. Foreign investors, on whom surcharges were placed shortly after the introduction of the Union Budget, had drawn out their funds in droves, sparking concerns of an impeding recession-like scenario. The worst-hit of these sectors was clearly the automotive sector, which has seen a 35% downfall in sales for July 2019 compared to the same period last year, in consonance with an estimated job loss of around 2.30 lakh positions, data released by the Society of Indian Automobile Manufacturers (SIAM) cautions.

In times of such a deluge, it is often best to hunt down the root of the problem at large. The twin balance sheet problem, in which both the industry and the banks are in the red, can be eliminated by a merger of banks alone, along with government’s capital infusion programmes. The drive comes at a time when the government has received a bonanza from the RBI in the form of a dividend transfer worth ₹1.76 lakh crores- out of which the government has promised a upfront capital infusion of ₹70,000 crores into banks to improve their lending positions already. In a slew of reforms that were announced a week back, the government has also been exploring the possibility of fast-tracking loan applications from Micro, Small and Medium Enterprises (MSMEs) by taking advantage of the liquidity with the PSBs with the last-mile connectivity of the non-banking financial corporations (NBFCs).

While it is clear that the mergers were much required and quite clearly the need of the hour, the question of whether the government would be able to contain the ramifications of the fallout of the simultaneous mergers, each of panoramic proportions, remains unanswered. Consolidation of the ten banks into four is certain to upset industry parameters, but the uncertainty can be contained by putting buffers in place wherever essential. In a bid to mop up the banking sector, the government should also look at the hard choice of terminating the service of under-performing employees over phases to help reduce operational costs in the long run. This may prove politically costly, but such a hard decision would also ensure the due efficiency of the lenders. For now, however, the FM has ruled out job losses due to the proposed mergers. The biggest hurdle is however something that is entirely the ballgame of the government: managerial boards. It would be in the country’s (and the government’s, of course) interests to put in people with a repertoire of financial knowledge and banking experience to lead the consortium of merged mega-banks. After all, dummies can lead well in times of profligacy, but such political compromises only results in diffused accountability when in crisis; and the government has only learnt of it the hard way.