On August 30th 2019 Finance Minister Nirmala Sitharaman announced collapsing of 10 Public Sector Banks in 4 Banks. A lot has been said about what will be the impact of this decision on NPA levels of these merged entities, whether it will lead to a rationalization of branch networks etc. These issues are important. But equally important is to acquire insights about the political economic forces which would have driven such decisions.
Here, there are few such insights, broadly divided into two sets of observations (a) From perspectives of global capitalism and (2) From perspectives of Indian political economy
From Global Capitalism Perspectives
1. Indian economy is increasingly being integrated into Global economy and Indian Banking and Financial sector into the global banking and financial sector. The pace may vary, but the direction set is irreversible at least in the foreseeable future. Hence, global capital and global banking and financial sector have a stake in the way in which the Indian economy and Indian Banking sector shapes. Indian economic policies will be increasingly “influenced” by the economic thoughts/ideas prevalent globally as also material interests of the global capital. The proposed bank mergers need to be seen in this light.
2. In a recent report Mckenzy reported that the profitability of Banking sector in Asia Pacific region is continuously declining: Profit Before Tax of banks in this region which was around 12% during the period 2011-14 declined to just 3% in 2014-18, as against global average of 7%. This, obviously, has eroded financial parameters like Return on Equity, Earning Per Share and Market Prices of many of these banks. Existing and prospective investors in this sector are nervous. The copybook remedy for such erosion of profit parameters is to scale up the banks and invest in fin-tech. The proposed bank mergers can be interpreted in these realities.
3. Mergers and Acquisitions (M & A) in the banking sector is catching momentum, particularly post 2008 Global Financial Crisis. Earnst & Young has reported that during the period between 2012 to 2017 on an average approximately 1000 banks, largely small and medium sizes, were merged annually with larger banks. Three fourth of these mergers have taken place in Europe and US.
4. In US, which has been the flag bearer for many neo-liberal economic policies and ideas, this trend of “Big Banks Becoming Bigger” is quite dramatic. By the end of 2018, the top 4 banks in US, viz., J P Morgan Chase, Bank of America, Citi and Wells Fargo, have more than half of banking assets held by all the banks in US; 15 years back this ratio was around 36%. This trend is evident even in many European countries too.
5. The banking sector is not an exception in which concentration of the market share in the hands of handful of big companies is happening. Air travel, publishing, pharmaceutical, metals, chemicals… there is a long list of sectors in which top 4 companies are controlling more than half of the market share. This phenomenon is being attributed to the emerging dominance of Monopoly Finance capital, particularly in US. Funds such as Private Equity, Mutual, Insurance, Pension, Hedge, Sovereign Wealth headed by ruthless fund managers are calling the shots in many corporates; they are no more passive investors, contended with collecting dividends and capital appreciation, but demand seats on the Boards and dictate major corporate decisions. It has been documented that the same set of investor funds hold significant proportion of voting shares in competing corporates in a particular sector. For example, Blackstone, Vanguard, Fidelity, Wellington, State Street are the funds which together hold significant shareholding in J P Morgan, Citi, BOA and Wells Fargo, the top 4 US Banks. The representatives of these investor funds on the Board, vote in tandem, and force the competing companies not to compete, particularly on price. Monopoly Finance capital is ensuring an overall reduction in competition in sectors after sectors so as to earn higher profit margins per unit of product/ service sold in the market. Unfolding consolidation of banking sector needs to be seen in these emerging trends in developed economies.
6. Foreign Institutional Investors, while identifying the stocks to invest, are normally guided by the market capitalization of the chosen stock. Market capitalization of India’s leading banking stocks look like a pigmy in comparison to global leaders in the sector. For example, SBI’s market capitalization of 32 billion dollars is just around 10% compared to that of JP Morgan (364 billion $), ICBC OF China (308) and Bank of America (294). Bundling of a group of PSBs in one entity will increase the market capitalization of the listed stock and may, eventually, become a candidate for higher FII investments.
7. FIIs as a group have significant shareholding in India’s Private sector banks, averaging at around 35%. However, their holding in PSBs is hovering around 5%. Creating a larger entity by mergers may entice FII to increase their shareholding in PSBs. This needs to be read alongwith Government of India implicit plans to dilute its own shareholding below 51% over a period in future.
From Indian Political Economic Perspective
8. Collapsing of 10 PSBs into 4 needs to be seen as an ongoing process of consolidation of Indian banking sector. A number of Public Sector Banks will be down from 29 to 12 over the next couple of years. Small and medium private and few urban cooperative sector banks are also being merged. As per DICGC statistics, many urban cooperative banks are being allowed to vanish.
9 Ongoing consolidation in the Banking Sector should also not be seen in isolation from major economic policies being implemented, particularly in the last five years. Demonetization and hasty implementation of GST has given a fatal blow to MSMEs and the informal sector. NCLT, IBBC, ARCs have created a new NPA resolution framework, wherein the emphasis is on forcing the lenders to accept deep “hair cut” sacrificing earnings and capital. Fiscal deficit norms under FRBM are religiously adhered to. Private sector participation and FDI norms are being liberalized and Corpoartes have been gifted huge income tax cuts. Consolidation in the Banking sector needs to be seen as an element in the chain of ongoing economic policy changes.
10 Finance sector in general and banking sector in particular, is expected to serve the “Real Economy”, which actually produces goods and services. Any significant changes brought out in banking sector is not an end in itself but is aimed at bringing desired changes in Real Economy. It has been so always. For example nationalization of banks in 1969 was aimed at sprucing up credit flows to agriculture sector as also to the informal sector (through among other measures, Priority Sector Lending, Directed lending, Differential Rate of Interests etc). Similarly, the listing of PSBs on stock exchanges in 1992, was a signal to change their performance parameters from social considerations to financial considerations (EPS, Share Price etc). We have to ask a question to ourselves “what kind of changes being sought to be achieved in India’s Real Economy by consolidation in Indian Banking sector” ?
11. The answer is “Long term objective of major economic policy changes is to facilitate larger and larger share of big corporates in provision of goods and services in the Indian economy, by pushing MSMEs and informal sector producers to the periphery”. An insight into US economy will provide us a clue. Annual sales of US Fortune 500 companies constitutes around 75% of US GDP; In India, in the absence of authentic data, the annual sales of top 100 companies listed on NSE is estimated to be around 15% to 20% of country’s GDP. In India, this percentage is sought to be gradually increased in future.
12. The creation of Big Banks is to facilitate the emergence of Big Coprporates in the Real economy. In the absence of a thriving corporate bond market, the Banking sector will have to chip in disproportionately high credit to the corporates. The prudential norms restricting loans to be sanctioned to a single corporate and/ or single corporate group prohibits relatively smaller banks from taking care of the credit needs of the big corporates. Smaller banks are also unable to absorb deep haircuts being forced by the new NPA resolution mechanism. Proposed bank mergers are aimed at partially addressing these two concerns of the big corporates.
13. Indian PSBs, with their legacy from the independence movement, have not only been financial but also “social” entities in their states of origin. No wonder many of them bear names of states, cities such as Maharashtra, Andhra, Allahabad, Baroda. There are lakhs of middle-class families who have banked with a particular bank, originated in their region, for generations. The officers and other staff working in a branch speak the local language, knows local festivals and mannerisms. Banks, apart from providing banking services, have bonded with their customers. This is a “social capital” acquired by the respective bank, translatable into “financial” business too. It is ironical that in a market the new management of the Big Banks will be sermoning its staff about winning over customer loyalties, whereas the merged entities have been created by submerging the decades old time-tested customer loyalties.
Sanjeev Chandorkar is Associate Professor at Tata Institute of Social Sciences, Mumbai