Unwarranted big bank mergers theory

By Abhijit Roy

The government�s move to merge various Public Sector Banks and reduce their numbers to just 12, is wholly unwarranted and clearly aimed at deflecting public attention from the economic slowdown and the mounting criticism the government is receiving on the Non-Performing Assets front. Actually mergers are not the answer to problems that besiege them. What is required is for banks to be freed from the stranglehold of the government which is the largest shareholder. PSUs are burdened with funding the give-aways and sops announced by the government. For instance, banks handled over Rs 1 lakh crore that came in under the Prime Minister�s Jan Dhan Yojana and the government has yet to compensate the banks for this job. Another reform needed is accountability. Presently the banks are saddled with non-performing assets of around Rs 8.08 lakh crores and this is the hard-earned money of the people that has been frittered away. Bank frauds account for Rs 71,542 crores, an increase of 73.8 per cent over the previous year�s 41,167 crores. The fact that most of the frauds related to advances shows that either due diligence was not done by the bank officials concerned or that they were complicit with borrowers in cheating the bank. Either way there should be accountability. But how many such offenders have been taken to task? Actually Mergers are driven by synergies � in products, costs, business, geographies or technology and the most important, cost synergies. While there may be some geographical synergies between the banks being merged, unless they realise cost synergies through branch and staff rationalisation, the mergers may not mean much to them or to the economy. This is where the government�s strategy will be tested. It is no secret that public sector banks are overstaffed. The success of these mergers, therefore, will hinge on how well these banks handle the sensitive issue of staff rationalisation. The All India Bank Employees Association has already raised the red flag. It was the Narasimham Committee in the late 1990s that recommended consolidation through a process of merging strong banks. The issue has been the proverbial bee in the bonnet of successive governments since then. What the committee also recommended was shutting down the weaker banks and not merging them with the strong ones as is being done now. But this is obviously not an option politically even for a government with a brute majority in Parliament. The biggest plus of the mergers is that they will create banks of scale � there are too many banks in India with sizes that are minuscule by global standards with their growth constricted by their inability to expand. Yet, this advantage of scale cannot be leveraged without adequate reforms in governance and management of these banks.

(Author is a columnist )