Opinion Banking on merger
Urgency on bank consolidation is welcome. But it must not distract from the bad loans mess, or problems of governance
-
Share -
-
-
File
In the third week of August, the government had announced a new framework to oversee proposals for merger of state-run banks. That initiative aimed at consolidation has now been taken forward. The finance ministry has recently written to banks to consider mergers and to discuss such proposals at the board level, reflecting a sense of urgency.
It may well have to do with the balance sheets of the majority of the almost three dozen banks owned by the government, of which at least half a dozen are under Prompt Corrective Action or PCR initiated by the banking regulator, which implies severe restrictions on lending. The RBI’s Financial Stability Report, released a few months ago, warned of a further deterioration of bad loans from 9.6 per cent of total assets at the end of March 2017 to possibly 10.2 per cent of total loans if economic conditions do not improve this fiscal.
The health check for PSU banks is, of course, far worse. The gross bad loan ratio could top 14 per cent by March 2018 and the capital adequacy level of many banks could fall below 9 per cent in a severe macro economic scenario, according to the Stability Report.
Clearly, the requirements of capital will be substantial over the next couple of years, with growing stress on account of bad loans and the need to meet the globally mandated norms on capital adequacy by March 2019. It is against this backdrop that the proposal for consolidation is now being weighed after it was mooted as early as 1991-92 by the Narasimham Committee which suggested three large banks with a global presence, eight or 10 national banks and several local or regional banks. The question now is whether mergers among state-owned banks would be driven more because of expediency and less due to synergies.
A strong view is that such mergers should not only be voluntary but also be between strong entities rather than involving a weak bank merging with a stronger lender. That’s because any effort at consolidation would call for time and effort on the part of the bank managements.
Such an attempt is certainly worthwhile if the broader aim is to improve standards of governance and to create an environment where state-owned banks, like their private peers, raise capital from the public market instead of allocating government resources, which should be directed for meeting socio-economic objectives. What’s worrying is that the current attempt of mergers, even if voluntary, runs the risk of distracting bankers from their primary task of resolving the bad loan mess. The moot point is whether consolidation would address one of the key issues plaguing these banks — governance. And whether this has anything to do with government ownership or control.
-
Share
-
-
-
Share
