Relevance: Mains: Current affairs: Analysis
Over the past decade and a half, India has evidenced several important mergers of public sector banks (PSBs), but the frequency at which such mergers have panned out in recent times—particularly, between April and August 2019—is without any precedence.
Following the merger of Vijaya Bank and Dena Bank with the Bank of Baroda, effective April 2019, the finance minister has declared four more mergers: Oriental Bank of Commerce and United Bank of India with Punjab National Bank (PNB), Syndicate Bank with Canara Bank, Andhra Bank and Corporation Bank with Union Bank of India (UBI), and Indian Bank with Allahabad Bank. While the consolidation will bring down the number of PSBs in this country by almost half, it will increase the average size of the merged entities.
For instance, a merged PNB is estimated to assume one and a half times its current size, while both Canara Bank and UBI will be double their respective sizes.
But, can this scaling up really restore the dwindling efficiency of the Indian PSBs?
In the first place, empirical evidences are rather ambivalent regarding the correlation of size and efficiency of banks, especially beyond a threshold size limit of say $10 billion or so in assets, within/at which the necessary economies of scale can be accrued.
That bigger size does not necessarily mean better performance has already been demonstrated by certain PSBs in India that outperform the private sector banks in size.
However, they flounder when it comes to the comparison of the market value of their assets with the latter. A classic example at hand is that of the State Bank of India (SBI), consolidated in 2017 during the previous tenure of the current government.
Despite a business of ₹ 52 lakh crore and market share of almost 22%, the SBI’s price to book value is nearly one-third of that of HDFC Bank, while the latter’s business and market share are almost a third or less of that of the SBI.
However, if the connotation of “efficiency” is restricted to operational readiness only, then merger can possibly ensure this on various grounds. First, a lesser number of banks would enable speedier decision-making across banks. In tandem, the binding pressures on the finance ministry to execute the appointments of senior banking personnel across a multiplicity of PSBs can be reduced.
Similarly, the incidence of coordination failure that thwarts a fragmented banking sector from resolving commonly faced problems like that of the non-performing assets (NPA) can be minimised.
But, whether such functional efficiency can actually be (operational) cost saving is suspect, especially in the context of the assurance given by the finance minister that there will be no lay-offs even with branch rationalisation. It is not clear how cost economies will be effected in the retainment and redeployment of staff.
In the banking parlance, efficiency measures a bank’s ability to transform its resources into revenues. In this paradigm, one should recall that the inefficiency of the PSBs is more related to their lending strategies and practices, particularly to the corporates, than to their size.
While consolidation can potentially enable the merged banks to provide bigger amounts of funding, and hence improve their bargaining position and pricing power vis-à-vis the corporates, systemic risks arising from having fewer larger banks may not be completely ruled out.
Historically, PSBs in India have demonstrated lending bias towards the big businesses and corporates. It is least likely that this attitude will change with the merger.
On the contrary, it may get reinforced with the consolidated entities using their (anticipated) pricing power to push for more corporate credit in order to strengthen their financial position.
This, however, is a risky proposition given the deteriorating financial health of the corporate sector, which is set to further worsen the bad debt crisis in the country. Thus, in the absence of a high degree of managerial ability and financially strong merging entities, making a success of the merger will be a far-fetched scenario.
But, is the government keen on the “success” of the merger from the perspective of a turnaround of the banking sector?
Or is this “success” restricted towards creating a “spectacle of reforms” while the moot issues for reform are left unaddressed? Suspicion pervades with a general feeling that the merger has not been articulated properly, neither in terms of its time lines, nor in spirit. Amongst the various questions raised regarding its efficacy, a fundamental one is:
Why do we need bigger banks, when we could not manage the existing (relatively smaller-sized) entities prudently?
Recall that the bad debt crisis had snowballed under the nose of the PSBs’ managerial boards. If the managements have not been able to deliver the performance of the existing level of assets, how do they propose to make a success of a much bigger and more complex entity?