Mega bank mergers: A re-think is needed (The Hindu)

Mains Paper 3: Economy
Prelims level: Banks consolidation
Mains level: Bank mergers and consolidation and its effect on economy

Context

• Creating globally stronger banks, doing away with needless overlaps in operations and infrastructure, and ushering in economies of scale to bring down costs have always been at the heart of any consolidation drive.
• Sadly, none of these compelling reasons have led to the mega public sector bank mergers announced by the Centre, which have brought down the tally of PSBs to 12 from 18.
• The shotgun weddings brokered by the Centre appear to have been triggered by one reason to ease the Centre’s burden of massive capital infusion into ailing PSU banks.

Key highlights

• Recent half-hearted attempts at consolidation have also delivered far from desirable outcomes. SBI’s bad loan problems only grew bigger after the merger of its five associate banks two years ago.
• Significant write-offs and persisting slippages have been eating into SBI’s profit and capital, impeding credit growth.
• The merger of Bank of Baroda with Vijaya Bank and Dena Bank last year was a thorny affair right from the start, given the weak finances of Dena.
• One year on, BOB’s numbers only confirm the underlying issues with forced mergers.

Reasons behind the banks consolidation

• The current round of proposed mergers stands on even weaker ground.
• Once the second largest PSU bank, PNB, hit by the Nirav Modi scam the worst-ever banking fraud is still grappling with scarce capital and fresh frauds.
• With its own NPAs at over 16 per cent, it is unclear how the Centre expects the bank to subsume the weaker OBC and United Bank. The logic for the merger of far weaker banks Union Bank of India, Andhra Bank and Corporation Bank is even more baffling.
• While the Canara Bank and Syndicate, as also the Indian Bank and Allahabad Bank, mergers involve at least one sturdier party, they come at the cost of debilitating the few stronger PSBs left.
• What is interesting but alarming to note is that the four mergers appear to have one common thread bunching up banks operating on a similar core banking solution.
• This would ease integration, but has it been the only rationale for the matchmaking?

Way forward

• The Centre proposes to infuse capital into the merged entities based on their size and need. But it’s highly unlikely that this will be the last round of capital infusion.
• Also, the fate of the six PSBs left out of the merger spectacle some of whom have NPAs of 20 per cent or more hangs in limbo.
• The much graver issue is that of finding the right leaders to steer the integration process at these colossal establishments.
• While the Centre has announced a slew of governance reforms, hoping to make managements more accountable to boards and give longer tenure to key officials to implement plans, these are unlikely to bring about significant structural changes.
• The move is also singularly ill-timed, with GDP growth plummeting to a six-year low. Turmoil in the banking sector can only hurt growth further.

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Prelims Questions:

Q.1) The term 'Tella Poniki' recently in the news, is a type of:
A. Post-Harvest Festival
B. Wood
C. Folk Dance
D. None of the above

Correct Answer: B
Mains Questions:
Q.1) The Centre’s forced bank mergers are both ill-timed and poorly thought through. Critically examine the statement.