“Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them.” Miguel de Cervantes Saavedra, Don Quixote
Every season an old idea finds new life. The idea in currency currently is merger of public sector banks (PSBs). Branded as consolidation, the agenda is to reduce the number of government-owned banks by merging smaller banks into larger anchor banks—Bank of Baroda, Canara Bank, Punjab National Bank and Bank of India. The road map for this consolidation, we are informed, is being worked out by the Niti Aayog.
The promoted thesis is that there is no need for so many, that is, 21 PSBs. The bare-bone details of the proposal suggest that the objective is to bring down the number from 21 to 12. The lure or allure of the initiative is to create large banking entities. That being the case why must there be 12 banks—what is the sanctity of 12? The votaries argue that eventually there should be only five banks. That begs the question: why not consolidate to five zonal banks, and do it now?
Typically, mergers of banks—in India as also in Europe and elsewhere—are guided by concern for the interests of depositors. In their book A Century of Banking Consolidation in Europe, scholars Manfred Pohl, Teresa Tortella and Herman van der Wee, observe “scale as a power factor in bank mergers is widely disputed, the majority of scholars seem to be skeptical.” And the history of banking in England under Montagu Norman is relevant.
The dissonance in policy that is preached and practice is striking. The Reserve Bank of India, through its many committees and reports, has consistently evangelised the need for more players to drive inclusion and competition— and even issued over 20 new licences. The bigger question is: what is the purpose of mergers? It cannot be just about “do we need X number of banks”? The European Central Bank lists 5,805 Monetary Financial Institutions and 4,937 Credit Institutions. Check the number of banks in Germany France and the UK.
What should be the number for the continental landscape of India’s $2 trillion economy with 1.31 billion persons? More pertinently, given the increased role of technology, does the landscape and circumstance call for nimble, smaller players or ginormous entities? There is also the conflation of tactics and strategy. Must consolidation be driven by the quest for scale or complementarity—of geography, technology, sectoral focus etc?
It could be argued that common ownership by the government is driving consolidation, and therefore the quest for mergers. That being the contention, what has been the recent experience? There is the ill-conceived and disastrous merger of Indian Airlines with Air India. Indeed, those in the State Bank of India, involved with the process of merging five subsidiaries and the Bharatiya Mahila Bank have some telling lessons to share—and mind you, this was mostly a merger of subsidiaries into the mother bank.
The unstated question is: what is the objective driving the initiative? The immediate crisis is the burgeoning volume of bad loans and the systemic risks it represents.
India has been grappling with the issue of twin balance sheets—now shrink wrapped into a convenient acronym, TBS! The twin balance sheets issue is in essence about the burden of bad loans on the books of banks and the pile up of debt on corporate balance sheets. This has precluded the ability of banks to lend, and of corporates to borrow and invest.
Yes, fewer banks translates to lesser number of banks with Non Performing Assets (NPAs). That is optics. The moot point is how does consolidation address the issue of NPAs? It is estimated that the government will need to make available over `2.25 lakh crore to recapitalise banks. This will impact the fiscal balance of the government’s balance sheet.
It has been argued that when weak banks are merged with bigger banks, the new entity will be able to raise capital from the equity market—thereby, mitigating the burden on government. State Bank of India Chief Arundhati Bhattacharya, who has the most recent experience, believes it’s a bad idea and says mergers should be between equals and about synergy, and that merger of strong and weak does not make sense.
The genesis of the merger mania is traced to presentations made by consultants on experience in Europe and the UK. It is a moot question how many of them were government-owned and how many were as unionised as banks in India. The headline aspiration in mergers is about resilience, reorientation and renewal. This means elimination of overlapping functions and overload of staff. This calls for liberty to retrench staff, refocus segments and revive growth. Elsewhere, the laws allow it and the ecosystem enables this. Would this be possible in the Indian context?
For sure, the mergers will amount to something—effectively, this is the second major rescue mission in less than two decades. The crux is whether consolidation will institute better governance and reduce recurrence of bad loans. Look at the current landscape that hosts PSBs and the accountability process. Listed on the bourses, the banks are owned by the Government of India.
Ownership is managed via the department of banking. Regulation is by the Reserve Bank of India. Then, there is the Bureau of Bank Boards, the newly-instituted oversight committee—neither of whom have skin in the game. Add the fear factor of the four Cs listed by the Economic Survey in 2017—the CBI, the CVC, the CAG and the courts.
The diagnosis of what ails PSBs and the prescription is readily available.
Three sentences from the recommendations of the P J Nayak Committee merit attention. It observes “the Central government is a good example of a bank shareholder, which has suffered deeply negative returns over decades” and proposes “the Government distances itself from several bank governance functions which it presently discharges” by constituting a Bank Investment Company, transfer its holdings in banks and the “powers in relation to governance”.
The elephant in the room is the cohabitation of ownership and management. Instead of tilting at windmills, the government may want to revisit the black board. It needs to craft a long-term strategy. To paraphrase Sun Tzu, mere tactics without strategy leads to noise and eventual defeat.
Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India