Public Statement | New Delhi, September 18, 2018
The Merger of Banks: Harmful, Ill-timed and Avoidable
The decision of the government to merge Bank of Baroda, Dena Bank and Vijaya Bank yesterday (September 17, 2018) is harmful to public sector banks (PSBs) and is a precursor for privatising the PSBs. The stated objective of the government as reported in the media is “Aspirations of the fastest growing economy have to be supported by stronger and globally competitive banks”.
The plan to merge the existing 21 Public sector Banks (PSBs) to form a few megabanks has been in the making for years now. The NDA government got cabinet approval for the merger in August last year, following which RBI was asked to give suggestions before Alternative Mechanism for possible consolidation and amalgamation of banks. Earlier, Minister of State in the Ministry of Finance, Shiv Pratap Shukla informed in Rajya Sabha on July 31, 2018, that presently there is no proposal before the Alternative Mechanism for its consideration. Hence, the decision of merging the three banks have come after subverting the parliament the same way as it was done in the case of Demonetisation.
The much-touted merger of India’s largest bank with its associates and Bharatiya Mahila Bank only resulted in it accumulating the bad assets of associates, costing its profit. Even SBI’s operating profit came down from Rs. 124 Billion Q3FY17 to Rs. 118 Billion Q3FY18, not to mention the first-ever loss in over a decade after accounting for provisions. The merger was not only a commercial failure, but it also resulted in closing down branches, reduction of staff and administrative hassles even though the merger was within associate banks.
While the government argues that the merger of one weak bank with two stronger banks will help to mitigate the burden of bad loans and further increase the lending capacity of the amalgamated entity it hides the fact that it would also necessitate more provisions by the new bank. Further, the new bank lending to the same large borrowers, without recovering existing bad loans will only result in more loss for the bank. A clean balance sheet by the merger of banks is the first step towards privatisation.
Not just commercially unviable, but a three-way merger among banks with the different administration will only result in administrative chaos. To merge many banks to make 4-5 big banks have been on the cards since this government came to power, believing they will be ‘too big to fail’. It is paradoxical that this merger is proposed just on the 10th anniversary of the fall of Lehman Brothers, the fourth largest investment bank in the United States.
When the lessons of SBI merger is clear as daylight, and when global experiences of big banks are glaring bright, it puzzles why the government is rushing to merge more banks. Why is the government pushing for this without initiating a public debate? Why are account holders not consulted and taken for granted? If not the government who would protect the depositors’ rights?
The need is not for big banks but good banks. The banking sector is facing an unprecedented crisis, but it can be solved through changes in lending policies, stringent recovery for corporate defaulters, proper due diligence for large-scale lending and penalising wilful defaulters and recapitalisation of Banks. Transparency and accountability at all levels need to be the hallmark of a genuine effort to cleanse the banking system. But, when the aim is to destroy the public sector bank to hand over to private players, then everybody loves a good crisis.