Public Sector Banks to be merged: Will it cure ailing banking sector?

The Union Cabinet has given approval to the framework for merging public sector banks (PSBs). The plan is to bring the number of public sector banks from 21 at present to somewhere between 10 and 15. However the blueprint of how things will move from here is yet to be finalised.
The banks have been asked to prepare their merger schemes in accordance with the regulations of Securities and Exchange Board of India (Sebi). The final scheme will be notified by the government after consultation with the Reserve Bank of India.
The decision can affect the Indian banking in many ways, depending on the path the government takes to merge the PSBs. The government may try to create banking behemoths based on the Chinese model. China boasts of having the four largest banks in the world, with a combined asset base of over $11,923 billion (Rs 764 lakh crore).
If India adopts this model, a large capital base will promote lending to large infrastructure projects within as well as outside India. Another foreseen benefit from the merger of PSBs could be the improved balance sheet of smaller banks that are currently struggling to survive due to unmanageable non-performing assets (NPAs).

The total amount of stressed assets in the Indian banking sector is estimated to be Rs 10 lakh crore. Out of this, Rs 8 lakh crore worth of loans have turned NPAs, affecting the capital base of the banks. Government-owned banks account for 90% of these bad loans. In order to continue lending to the industry, the banks need capital infusion to the tune of Rs 95,000 crore, according to global ratings and research agency, Moody's.

The government is not in a position to arrange that kind of capital for the banks, hence a way out has been devised in the form of mergers that would allow raising capital in the open market.

Mergers will also lead to cost cutting by banks in the form of shutting down of certain branches and reducing the staff.

In an interview with ET Now, former banking secretary DK Mittal said, “The depth of the banking system is going to be much deeper and because of that the benefits in terms of manpower, branches, technology optimisation is going to be much higher than it was.”

But will this be easy?

According to All India Bank Employees Association (AIBEA) leader Vishwas Utagi, “We will go on strike. It is all being done to privatise the sector to benefit corporates. First they will reduce the number of banks and then they will invite private players to take over the banks. The government wants to deviate the attention from the failure to recover bad loans to the merger of banks. The banking sector is in trouble not because of the number of banks, but because of the bad loans. The government must focus on the real problem”.

The government is hoping for a repeat of State Bank of India's experience in which the country's largest bank took over the management of 6 affiliate banks. The older staff was asked to take Voluntary Retirement Scheme (VRS) and as many as 716 offices (594 branches and 122 administrative offices) were shut down this year. But there have not been any protests as yet.

A contradiction

Madan Sabnavis, chief economist at Care Ratings, believes that the merger will improve the situation only on paper. The balance sheet of weaker banks will improve as they will cease to exist. But the overall problems of the banking sector will persist.

“The larger banks will benefit only if the government is willing to dilute its equity below 51%. Otherwise why would private sector invest in the bank if the management of the banks is going to remain the same?” asks Sabnavis.

“I am not saying that privately held banks are better, but unless the government is willing to let go of its control over the PSBs, the private sector would not see much value in the banks.” added Sabnavis.

At present, the decision to reduce the number of PSBs looks more like a ‘hit-and-trial’ methodology with not much empirical evidence to back the decision. But since the decision has been taken, one needs to wait for the government blueprint to come out.