HYDERABAD: Soon after announcing the historic bank mergers last month, the government handed a Rs 60,000-crore bill to taxpayers. That’s the sum state-run lenders (and IDBI Bank) are charging us this quarter to make up for their collective inability of shoring up equity capital. This fiscal act is boringly called bank recapitalisation.
Ideally, the hodgepodge of 10 public sector banks (PSBs) into four should reduce the burden of socialising future losses, but Finance Minister Nirmala Sitharaman promised to rescue lenders anytime with more free money. For taxpayers, there’s no such luck as similar such bills need to picked up later. By merging, the government wants us to believe that the souped-up banks will lead us to the $5-trillion economy, but here’s the thing: the move, experts say, is wrong at every turn.
“Asset quality and profitability will remain broadly unchanged after consolidation. PSBs already score poorly on these two factors, and there’s no reason to assume that the merged entities will make significant improvements in these metrics,” said Srikanth Vadlamani, Vice President and Senior Credit Officer at Moody’s. Vikas Jain, Senior Research Analyst at Reliance Securities, believes it’ll take long time for better economics of scale to materialise and integration won’t be without initial profitability pain. That stands true for multiple reasons.
For one, compulsive mergers are guaranteed disappointments. We’ve Oriental Bank of Commerce-Global Trust Bank and Punjab National Bank-New Bank of India alliances as living proof. Two, integration takes time, during which period credit growth declines. SBI-Associates’ merger and Bank of Baroda-Vijaya-Dena Bank merger are recent test cases.
Credit growth not to be hampered by consolidation
“Consolidation would limit downsides to stressed PSB balance sheets and not lead to any meaningful upside for credit growth in near-term. For any long-term uptick in credit growth, we will need to wait for emerging synergies on costs, processes, geographical presence and customers. As of now, we believe synergies could take 3-5 years to realise as against 2-3 years for private players, typically," said Avneesh Sukhija of BNP Paribas.
Three, committee after committee suggested only two things: Closure of weaker banks, and privatisation. If the Narasimhan committee in 1998 proposed 3-4 large banks with minions at the bottom, besides suggesting shutting down of weaklings instead of merging them with strong banks, the P J Nayak committee in 2014 recommended outright privatisation. Such a move eliminates PSBs’ addiction to government handouts every time they mess up. This dependency on taxpayer funds, in everyday personal finance jargon, is like you blowing up earnings on fancy cars, and expensive Micheline-star lunches only to approach your obliging father to cover your bills out of the family piggy bank.
Because PSBs have an implicit sovereign guarantee ensuring safety of deposits, perpetual capital infusion is stripping our coffers bare. Since 2015, we've pumped Rs 3 lakh crore in PSBs, which gave dismal returns. Will mergers end the constant flow of funds to banks? There are no easy answers.
Still, privatisation is a no-go as it unsettles politically-sensitive unions' fear of job losses. In any case, banks are sweating it out to raise capital from markets as investors' trust hit a bottom. Whether there will be buyers is anybody's guess, given the bad loans' baggage.
Even if privatised, government is unlikely to have respite when crisis hits home. As we've seen globally, countries bailed out even private banks to avoid large scale financial destruction. Thus, the government projects mergers as the only reasonable option, though for the rest of us, it appears far too credulous.
FM Sitharaman listed benefits like enhanced credit and risk appetite, efficiency gains, better loan monitoring, and recoveries. But without branch and staff rationalisation, they won't deliver much, concluded Credit Suisse with evidence on its side. According to Gautam Duggad, Head of Research at Motilal Oswal Financial Services, the 10 PSBs contributed a mere 13 per cent to incremental loan growth due to weak capital position and mounting bad loans. “The government has wisely kept few PSBs untouched while giving them growth capital, which should help meet the economy’s credit requirement while the consolidation activity is underway,” he added.
Challenges in short-term are unavoidable as managements wriggle out of cultural and administrative issues at the expense of higher credit growth. Government also promised zero retrenchments, but it’s likely that banks will sweeten voluntary retirement deals to unload excess baggage, while lease rentals won't be renewed, reducing branches. A few years down the line, if execution is flawless, there will be economies of scale and project financing for large projects will be a breeze. But that’s a big if.
Though none bought the view that mergers were a reform measure, what has gone unnoticed are the structural reforms Sitharaman unleashed. For instance, management accountability is tied to bank boards, chief risk officers will be recruited at market-linked compensation, risk management committees will have fresh mandates, succession planning is given thrust, and many more. Agreed, the NDA-1’s ballyhooed Indradhanush plan too embodied similar measures, but it's only now that full-scale governance reforms are proposed.
But Srikanth Vadlamani of Moody's believes these changes are incremental. While boards are empowered, their roles and responsibilities will remain significantly circumscribed compared to private banks. “For instance, the role of the board in key areas like deciding on long-term strategy and human resources wfied," he noted.
Arguably, bank mergers are the most significant move we have seen since bank nationalisation. Subsuming 10 banks into four at once will undoubtedly cause an upheaval. Either the government has clues — that we don't know — to navigate the crisis without getting hit, or it's blindsided by its steadfastness to arrest 'doom and gloom' just by doing something (or anything). Given the slack in bank credit and NBFCs' crisis, what emboldened Sitharaman is puzzling. But for now, we may have to hold brickbats and battle honours until time delivers conclusive evidence.
‘Wait and watch’
Consolidation would limit downsides to stressed PSB balance sheets and not lead to any meaningful upside for credit growth in near-term, said BNP’s Avneesh Sukhija. “For any long-term uptick in credit growth, we will need to wait for synergies on costs, process, geographical presence and customers.”