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.
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