Bank mergers and  magical cures

The government on Wednesday gave an in-principle approval for bank mergers.

Published: 26th August 2017 04:00 AM  |   Last Updated: 26th August 2017 12:29 AM   |  A+A-

The government on Wednesday gave an in-principle approval for bank mergers. On the face of it, it appears the consolidation can cure all ills ailing our Public Sector Banks (PSBs). It is a part of the government’s ballyhooed divestment/privatisation programme of state-run companies and is expected to bulk up size and scale, but experts beg to differ.

The PSBs are facing what economist Steven Cohen coined in his new book—the junkies’ dilemma. It’s a choice between going cold turkey or continuing operations only to experience a bigger bust later. The PSBs are firefighting the bad loans mess, struggling to maintain credit growth which stood at a pedestrian 5.1 per cent as 1,000 companies borrowed `1 lakh crore less in FY17, and are under intense pressure to raise nearly Rs 1.1 lakh crore on their own to comply with Basel norms.

The government believes these problems are temporary and consolidation will nurse banks’ balance sheets back to health and boost their capital-raising ability. That’s likely wishful thinking—not just in banking, merger proposals in other sectors too offer few strategic benefits. For instance, the ONGC-HPCL combined entity will be an integrated oil major, but is unlikely to help India gain a global role. It’s also unlikely to create additional shareholder value, leaving the government as the sole beneficiary when it receives Rs 26,000 crore— 40 per cent of FY18’s disinvestment target.

Typically, mergers are pursued to gain synergies, economies of scale and save costs, but in this case, it’s being done purely from an administrative perspective. The PSBs, by joining hands, will be forced to trim manpower and undertake branch rationalisation. But unless the government along with the RBI helps PBSs focus on core strengths, besides mitigating exposures to risky assets, ironing out issues related to interconnectivity, regulatory compliance and improving credit quality to a peacetime record of 10 per cent plus, restoring the sector’s growth will remain an unfinished agenda.

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