Politics, it is said, is the art of the impossible. In the early phase of the UPA government’s first term between 2004 and 2009, the Finance Ministry headed by P Chidambaram was pushing hard for consolidation of state-owned banks. The first such proposed merger was of two Mumbai-based banks — Bank of India and Union Bank of India. The boards of both were to approve the proposal after being nudged by the government. But at the last hour, it was called off after a political call by the Manmohan Singh government, presumably taking into account the fallout of such a move in a coalition that had the support of the Left parties.
When on Friday, Finance Minister Nirmala Sitharaman announced the mega merger of 10 public sector banks into four, she was in effect implementing a plan whose outline was contained in the report of an expert committee submitted nearly three decades ago. It was that report, whose main author, Maidavolu Narasimhan, is a 92-year-old former Governor of RBI, that talked about merging banks. Various governments and the Reserve Bank of India have all been guided by the report and recommendations. The committee, appointed by Manmohan Singh when he was Finance Minister and at the peak of the balance-of-payment and economic crisis in 1991-92, had suggested a new banking structure in India besides several other important measures in its two reports. What it envisaged then was a banking system with three or four large banks at the top with a global presence and size, eight to ten national banks which would cater to the needs of local industry and infrastructure, and a bottom tier consisting of a large number of regional or local banks.
The committee also favoured mergers to build the size and strength of operations for each bank. Since then, almost every major committee for financial sector reforms has suggested consolidation of banks or reducing the number of banks owned predominantly by the government. These include the committee appointed by the Planning Commission during the UPA government’s term and headed by Raghuram Rajan, the committee on fuller capital convertibility headed by former RBI Deputy Governor S S Tarapore, the one headed by Percy Mistry, apart from the RBI which laid out a blueprint in a discussion paper on the way forward for Indian banking.
The rationale of experts for pruning the number of government-owned banks, which was over two dozen, was that with economies of scale, they would be more efficient and profitable. Besides, with pressure on government resources and growing demands to fund social sector programmes, infusing capital for a large number of banks would be a drag for the government, especially with many banks unable to raise the required capital from the markets directly. In May 2013, when Chidambaram returned to the Finance Ministry after a stint in the Home Ministry, said in his annual day address at the Competition Commission of India: “Some PSU banks among the 26 we have may be better off merging. The need for two or three world -size banks in an economy that is poised to become one of the five largest in the world is rather obvious.” In short, it is something on which the government (the largest shareholder in many of these banks), the RBI and experts have been on common ground.
The mergers that followed
There were mergers and amalgamations during that period which involved private banks such as HDFC and ICICI and also Punjab National Bank. But the first big merger subsequently was when some of the associate banks of the State Bank of India were merged with the parent bank during the first term of the Modi-led NDA government. Technically, or on paper, that was a decision approved by the boards of SBI and the respective associate banks. It was rather an acquisition. But the last of the relatively bigger mergers like this time around (featuring four new entities and the folding of some banks into a bigger lender) that saw Dena Bank and Vijaya Bank being merged into Bank of Baroda — all publicly listed entities — was announced first by the government.
In its report, the Narasimham committee had made it clear that large banks should merge only with banks of equivalent size and not with weaker banks, which should rather be closed down. That may not be the script being followed in the last few cases, especially when the accompanying steps announced by the government indicated that boards of state-owned banks would be strengthened.
Former RBI Governor Y V Reddy had said in a lecture last year that the origin of PSU banking in India was political through an ordinance, its evolution has been political and its future will perhaps be determined by political and economic considerations. Last weekend’s big move by the government reflects that.