Finance Minister Arun Jaitley’s announcement on Saturday that the government is considering setting up an expert committee on public sector bank (PSB) consolidation has raised hopes for concrete action on an issue that has been discussed and debated for many years. Certainly, there is a strong case, in theory, for merging some of the PSBs, which are still very small compared to their global peers – India’s largest bank, State Bank of India, ranks only 67th among global banks. ICICI Bank is the only other Indian bank that features among the top 200 banks in the world in terms of assets. A growing economy of the size of India needs a less fragmented domestic banking industry. So Mr Jaitley is right when he said at the concluding session of Gyan Sangam II, a two-day conclave of PSB chiefs and government policymakers, that what India needed was stronger banks and not lots of banks.
The problem, however, lies elsewhere – bank consolidation as an idea isn’t new. The Narasimham Committee on financial sector reforms had mooted this first and several others followed suit. A working group set up by former Finance Minister P Chidambaram had come out with detailed modalities on how to go about it. In that sense, there is already enough wisdom available with Mr Jaitley, and the need for another expert committee isn’t clear, especially when the recently set up Banks Board Bureau also has bank consolidation as one of its mandates. The big concern is that mergers in the past have been used as a tool to bail out weak banks. The merger of New Bank of India with Punjab National Bank in the 1990s drained the acquirer massively; it took years to recoup. The merger of Global Trust Bank with Oriental Bank of Commerce was necessary to take care of the interest of depositors and prevent further turmoil in the affected bank, though the acquirer had to bear the financial load of that decision. A successful case of consolidation was the merger of two associate banks of the SBI with their financially strong parent. But for a large number of PSBs, which are struggling with stressed assets, it is debatable whether they are in any position to take over their smaller and weaker counterparts. There are also the usual challenges of technological compatibility, human resources issues, etc – each of which has to be thought through carefully. And, most importantly, it is doubtful if merely consolidating some PSBs would rid them of their current ills. Indeed, improving the operating environment for these banks and reducing the government stake in them to below 51 per cent would be a more effective remedy.
The Reserve Bank of India has stated at the Gyan Sangam that banks have other avenues to raise capital including the additional headroom on Tier-I capital because of the tweaking of Basel III norms. But there is a high risk of investors or rating agencies being sceptical of the easier capital recognition norms unveiled last week, as past experience suggests unlocking real estate to ensure capital adequacy is a time-consuming affair. Given their current financial situation – gross non-performing assets of listed public sector banks were Rs 3.9 lakh crore in December 2015 – many banks might need real capital. When the Centre unveiled its recapitalisation road map for PSBs, it said that excluding internal profit generation, the requirement of extra capital for the next four years up to FY19 is likely to be about Rs 1.8 lakh crore, although that estimate has now been reportedly scaled down. Implicit in the Centre’s plan was the expectation that these banks would be able to tap the capital markets for their remaining funding requirements. How this plan gets implemented will depend on a host of factors including the PSBs’s performance and the state of the markets.
