As part of the Centre’s continuing focus on addressing the crisis in public sector banks, Finance Minister Arun Jaitley has announced that an expert group will be set up to examine consolidation among PSBs. The announcement — at the end of the two-day Gyan Sangam, a retreat for the heads of public sector financial institutions — is part of a larger set of measures the government intends to take to shore up the PSBs, which account for about 70 per cent of Indian banking. However, while the wider goal of consolidating weaker PSBs with stronger PSBs is a worthy one, it is definitely not the first step towards resolving the ills currently plaguing the PSBs. The growing problem of non-performing assets — gross PSB NPAs rose from Rs 2.67 lakh crore to Rs 3.60 lakh crore between March and December 2015 — is a reflection of the systemic inadequacies that plague these banks. In particular, the disempowerment of bank boards has landed the PSBs in the present mess. In the current context, then, consolidation needs to follow reforms, not precede them.
There are two broad reasons why consolidation should not be the first step. For one, consolidation works when a weak bank is merged with a strong one. However, at present the whole banking system is struggling. Finance ministry estimates have pegged the total stressed assets (NPAs plus loans written off) at Rs 8 lakh crore. Even the biggest and strongest PSBs like the State Bank of India are weighed down by massive NPAs. Merging two weak banks will only consolidate the existing NPAs under fewer banks, not resolve the main reason for the crisis. Two, the sustainable solution to inefficient decision-making requires the government to distance itself from the daily functioning of the PSBs. This, in turn, calls for structural reforms, such as those suggested by the P.J. Nayak committee report in May 2014, which include reducing government stake in PSBs and instituting a Bank Investment Company (set up under the Companies Act) tasked with protecting the government’s investment as well as improving the governance of the board by recruiting experts.
To be sure, several allied steps must be taken to address the problem of NPAs from other angles as well. Government proposals to amend the SARFAESI Act 2002, make debt recovery tribunals more effective and improve recruitment processes in PSBs, are welcome. A Banks Board Bureau, which seeks to reform the appointment process for top posts and governance in PSBs, has already been instituted. However, it is not clear whether the BBB is independent enough to yield the desired results. In this regard, the finance minister’s budget announcement on transforming IDBI Bank, and that lowering government’s stake below 50 per cent in it is being considered, will be a test case.