The announcement by the finance minister that Bank of Baroda (BoB), Vijaya Bank and Dena Bank will be merged to form the third biggest bank in the country once again exposes the government’s temptation to take major decisions without adequate study of its implications on the financial system and making it vulnerable to greater risks.
The government has said that the three-way merger of a weak Dena Bank and strong BoB and Vijaya Bank will be the right step in the ongoing process of reforms. It is also claimed that the merged entity will be strong and competitive and will reap the economies of scale. Is the government chasing a mirage?
Ever since the Narasimhan Committee I (1991), the issue of consolidation of public sector banks (PSBs) has been a subject of intense debate. The very crux of the argument for consolidation of banks is the claimed advantages of size like economies of operation and ability to face competition. The past experience in India does not, however, strengthen this perception of gain.
In the post-nationalisation era, the first merger of PSBs was that of New Bank of India (NBI) with Punjab National Bank (PNB) in September 1993. That was prompted by the government’s desire to bail out a tottering NBI which had an accumulated loss of Rs 450 crore against its capital of Rs 186 crore. An efficient PNB took a couple of years to come out of the after-effects of a forced merger.
Similarly, the merger of privately owned Global Trust Bank, then a new star of financial liberalisation, with state owned Oriental Bank of Commerce in 2004, seriously affected the earnings of OBC.
In the first round of its restructuring, two associates of State Bank of India – State Bank of Saurashtra and State Bank of Indore – were merged with SBI in 2008 and 2009 respectively.
In the latest round completed in March 2017, the remaining five associate banks were merged with the mega SBI. Did these mergers bring a sea change in SBI’s fortunes? There are no satisfactory answers.
A security personnel stands guard in front of the gate of the State Bank of India (SBI) regional office in Kolkata May 23, 2014. Credit: Reuters/Rupak de Chowdhuri/Files
On the contrary, reports have regularly appeared about the problems of customers of erstwhile associate banks (e-ABs) who had to pay higher service charges and who felt alienated in a new work culture. The staff of e-ABs also had issues regarding the SBI’s proposal to recover certain compensation paid to them for the overtime work they had to do during the demonetisation era. The SBI itself has not been in the pink of health after the two mergers.
The government’s claim of higher efficiency due to economies of scale is presumptive in the wake of experience both in India and abroad. The global financial crisis of 2007-08 had undisputedly established that when institutions are too big, regulatory intervention would get diluted resulting in the imperative of state monitored bailouts at the tax-payers’ cost. Learning from that experience, the US Federal Reserve revisited its role and emerged as a “regulatory institution with more authority and power. This had made the banks do better there”.
In contrast, the Reserve Bank Governor is on record that he has no power to regulate the ailing PSBs. In dealing with the largest private lender, ICICI Bank which is currently under public scrutiny for all the wrong reasons, the RBI’s role was not edifying. If RBI cannot regulate smaller PSBs can it monitor megabanks?
The government’s decision is apparently without informed consultation with the stakeholders like the top managements of the banks themselves and their employees. Boards are now asked to approve a government-sponsored scheme.
Vinod Rai, before demitting his office as chairman of the Bank Boards Bureau in March 2018, had made a pertinent suggestion in his compendium of recommendations (CoR) sent to the finance ministry. He had underlined the need to engage with various stakeholders and offered BBB’s advice to the government to ensure that PSB consolidation is least disruptive, so as to minimise the reliance on the tax payers and to maximise the outcomes for all.
The current decision, as the FM declared, was taken by a panel of three ministers, Piyush Goel, Nirmala Sitharaman and Jaitley himself. They could hardly be considered either stakeholders or experts.
Apart from the issues related to absence of informed deliberation for such a far reaching decision what are the other issues which invite questions of its efficacy? They do not need an expert to understand. Bank of Baroda and Dena Bank originated in the western state of Gujarat. For historical reasons, their branches in that state are quite large and overlapping. There will have to be merger of contiguous branches not only in that state but in other parts of western India which can affect the customers of the branches that lose their identity. There will obviously be staff surplus requiring relocation or enforced retirement.
The merger of Vijaya Bank with BoB will pose a different set of problems related to cultural shock. Vijaya Bank, started in 1938 in Mangaluru, Karnataka, had a work culture intertwined with the local milieu. Although after its nationalisation in 1980 it grew into a national bank, its roots continued to grow with same bonding. When an enforced merger takes place both the staff and its large clientele will face problems of a lost identity.
There are more pressing issues which have now gone to the back burner. The worrisome issue of the NPAs appears to have been allowed to abate on its own. There are also the unfinished five agenda of reforms unveiled under the package Indradhanush in August 2015.
On Bank Boards Bureau, Vinod Rai’s CoR stands as a testimony for government’s unwillingness to act in time. De-stressing of assets is caught up in the web of blame game on under whose regime assets got stressed and who hobnobbed with tycoons. Bank managements are yet to be empowered as evident from the after-effects of the Prompt Corrective Action regime where even loans to the small borrowers and MSME are facing the axe. Accountability at the top level has got stuck in the quagmire of legal wrangles. A system is yet to be framed. And least forward movement has taken place in the matter of governance reforms, a key reform in the Indradhanush package.
In sum, what is the time frame by which the ailing PSBs will regain their health, how does the government plan to achieve this and finally, what are the institutional safeguards to insulate them from recurring vulnerabilities like the ones suffered in the recent years?
In 2011, former RBI governor Y.V. Reddy had said: “There is a global consensus that banks that are too big to fail are sources of serious risk to financial stability.”
In planning to build another mega bank through mergers of heterogeneous entities without seriously attempting to reform governance issues the government is embarking on a risky venture which can make the PSBs more vulnerable than they already are.
T.R. Bhat was joint general secretary of All India Bank Officers’ Confederation from 1995 to 2009. His book, Reforming the Indian Public Sector Banks-the Lessons and the Challenges, was released in April 2018.