Indian banks are becoming bigger, by getting smaller. The proposed merger of Bank of Baroda, Vijaya Bank and Dena Bank reduces the PSB count to 19 and comes a year after the government’s in-principle nod for consolidation, copping out on privatisation. After a summer of limbo in ripping out bad loans by the root, we are now told that mergers are the only game in town. This, experts say, isn’t a bespoke deal, as it forces a wounded shark (BoB) to rescue a sickly whale (Dena).
There are two types of bank consolidation. Voluntary mergers under RBI’s Section 44A, driven by economic logic, which only private banks have done: ING Vysya-Kotak Mahindra Bank and HDFC-Centurion Bank of Punjab are examples.
The other is forced mergers under Section 45 to save weak lenders, like the Global Trust Bank-OBC and New Bank of India-PNB mergers—which remained colossal failures. When a strong and weak bank merge, the combined entity loses competitiveness and the merger is counterproductive. An RBI working group recommended avoiding such events without first restructuring weaklings—a step now being bypassed.
Timing is everything in elections and the desperation to take the applause for fixing banks and figuring in the top 50 global banks (only SBI figures there now) is telling. While large banks can ride off troughs with ease, merging strong and weak players isn’t the answer, but a problem. Large isn’t always beneficial, as the too-big-to-fail norm compels government bailouts, which is borne by us taxpayers.
Failures are the essence of capitalism, so before gaining size, we need measures that allow banks to fail safely without causing systemic shocks like Lehman Brothers. No math can correct errors made out of lack of self-discipline, and as we still fight the last NPA war, rather than planning for the next one, it’s time to act bold, taking haircuts and ceding control to private parties. For, in a growing economy, banks should lend without worrying about provisions or sacrificing profits at the altar.