Saturday, July 29, 2017

'For Whom the Bell Tolls?' Bank Mergers

Consolidation, Convergence and Competition of Banks in India

Cooperative Banking suffering weak governance, poor legal framework, dual regulation, and excessive politicisation is in search of sustainable solutions and the consolidation move in the three states rightly highlighted by Bloomberg in its article a few days ago is perhaps the right move. Following the recommendations of Vyas Committee (2005) NABARD amalgamated the 196 RRBs established under the Multi-Agency approach to rural lending in the country during a fifteen year period till 1990 into 64 by 2013. This amalgamation has only partial success as the RRBs are still distant from the objectives of their creation in 1975.
1991-2001 saw bank disintermediation in the wake of financial liberalisation, prudential norms and profitability focus. Directed credit program was blamed for the rising NPAs till then. I recall Dr.Y.V.Reddy mentioning in his latest book ‘Advice and Dissent’: “the seeds for bad times are always sown in good times.” 2003 was the year of ‘crazy credit’ that took the route of CDRs in 2010 and 2011. This grew into a immature NPA adult and aged along to reach the unsustainable level of around Rs.8trillion. Courtesy this situation, lazy banking had set in.

2005 gave a clarion call of financial literacy, financial inclusion and financial stability. This saw the banks’ boards committing to rural expansion, and routing financial inclusion through business correspondents. In the wake of shrinking supply of credit to the needy sectors like the micro and small enterprises, 2015 saw the emergence of small finance banks, and Payment banks to meet the increasing demand.
PSBs constituting 73% of Banking in India were in the eye of the storm of ever rising NPAs notwithstanding the legal facilitation through SAFRAESI Act 2000. Insolvency and Bankruptcy Code was brought into effect to tame the alarming situation. The rising capital adequacy compliance requirement under Basel III by April 2018 and the global financial stability, backed by the forgotten Narasimham Committee (1991) Report suggesting three tier banking with three banks at global   tier, six to eight banks at tier two and a huge spread at tier three seemed to have pushed for picking up the 2005 clarion call of Chidambaram on consolidation, convergence and competition.
Viral Acharya et.al (2011) in ‘Guaranteed to Fail’ argued for a PPP model for better organising and managing government-sponsored enterprises. Strangely, Acharya batted for the merger of Associated Banks with the SBI to form a bank of global size. Now, the song is for creating some more mergers in the PSBs notwithstanding ten of them on watch list with MoUs for their turnaround. Within the country, there is stunning example of small banks in private sector performing better than their elder brothers.
Whose call is this for mergers? Does it benefit the customers? Does the size of the balance sheets provide leverage for responsible credit flow? Does it improve the technological prowess of the merged banks offer affordable charges and more services to the customers than now? Will these mergers take the banks to better rating in spite of the bloating NPAs? Will these banks be enabled to have more private participation in governance? Why RBI is not prepared to go out of the Boards of PSBs? Has the recent demonetisation led to improving the image of the Banks? Answers to all these will be disappointing.
The voice of SBI initially to wait and watch for the merger was silenced successfully by the owner. Three months down the line, migration of accounts to the main platform is slow. HR issues are in conundrum. Poor management of loan accounts are hitting several retail and small enterprise borrowers. Discomfort of several managers is a silent agony. Merger announced branch shrinkage to 5000 and staff readjustments through retirees finding no replacement.
Former Governor Dr Raghuram Rajan’s warning in 2016 that the merger move is risky without cleaning up the beleaguered banks’ balance sheets reached the deaf ears of the  FM. FM’s red carpet to multi-national asset reconstruction companies (ARCs) providing scope for sale of distressed assets proved a failure. In the wake of global recession even Robert Koenig gave a clarion call for breaking up mega banks in the interest of global financial stability.
Government did not seem to have learnt lessons from the 38 mergers occurred before the SBI merger. SBI Chairman was on record recently to say that the NPA position worsened post-merger. It would take considerable time to settle down. Anyway, she will step down shortly and the heat will be on the successor! It is not size that is the solution to the problems as much as good governance and the government maintaining arm’s length distance from the governance and management of PSBs. Bank Board Bureau and Gyan Sangh’s recommendations have not proved thus far effective.
Even among the PSBs there are banks with regional flavour where the customer loyalties are still contributing to their image and this will for sure take a beating if they allow some weak banks to join them at the behest of their owner, government.

I argued in the Money Life (March 10, 2016): It is also important that the big banks start becoming humble and learn lessons instead of becoming conglomerates of unwieldy nature. Banking basics and customer service can hardly be bargained. Government would do well to restart the Development Banks to fund infrastructure projects and relieve the PSBs from this window as experience amply demonstrated that they are not cut for that job well due to their funding long-term projects with short term resources.

Recent regulation restricting single corporate exposure to Rs.500cr in any Bank is well thought out and should restore the credibility once the IBC hopefully gives reprieve to the beleaguered PSBs. Government would do well to listen sane advice of putting further mergers on back burner until the results of SBI merger are out – may be it will take a couple of years.
 *The Author is an economist and risk management specialist with three decades of banking experience.