Cooperative banking, suffering from weak governance, poor legal framework, dual regulation and excessive politicisation is in search of sustainable solutions and the consolidation move in three states highlighted by Bloomberg in its article a few days ago is perhaps the right move. Following the recommendations of the Vyas Committee (2005), the National Bank for Agriculture and Rural Development (NABARD) amalgamated 196 regional rural banks (RRBs), established under the multi-agency approach to rural lending in the country during a 15-year period till 1990, into 64 banks by 2013. This amalgamation has met with only partial success as the RRBs are still far from achieving the objectives for which they were created in 1975.
The 10 years between 1991 and 2001 saw bank disintermediation in the wake of financial liberalisation, prudential norms and profitability focus. The directed credit programme was blamed for rising non-performing assets (NPAs) till then. Dr YV Reddy says in his latest book, Advice and Dissent, “The seeds for bad times are always sown in good times.” 2003 was the year of ‘crazy credit’ that took the route of corporate debt restructurings (CDRs) in 2010 and 2011. This grew to reach the unsustainable level of around Rs8 lakh crore. Lazy banking had set in.
In 2005, there was a call for financial literacy, financial inclusion and financial stability. This saw the banks’ boards committing to rural expansion, and routing financial inclusion through business correspondents. In the wake of shrinking supply of credit to needy sectors, such as micro and small enterprises, 2015 saw the emergence of small finance banks and payment banks to meet the increasing demand.
Public sector banks (PSB), constituting 73% of banking in India, were in the eye of the storm of ever rising NPAs, notwithstanding the legal facilitation through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The Insolvency and Bankruptcy Code (ICB) was brought into effect to tame the alarming situation. The rising capital adequacy compliance requirement under Basel III by April 2018 and the global financial stability, backed by the forgotten Narasimham Committee (1991) Report, seemed to push for P Chidambaram’s call for consolidation, convergence and competition.
Viral Acharya, Deputy Governor of Reserve Bank of India (RBI) argued for a public-private partnership (PPP) model for better organising and managing government-sponsored enterprises. Strangely, Mr Acharya batted for the merger of associated banks with State Bank of India (SBI) to form a bank of global size. Now, the demand is for creating some more mergers in the PSBs, notwithstanding the fact that 10 of them are on a watch list. Within the country, there is stunning example of small banks in the private sector performing better than their senior peers.
Whose call is this for mergers? Does it benefit customers? Does the size of the balance sheets provide leverage for responsible credit flow? Does it improve the technological prowess of the merged banks to offer affordable charges and more services to customers than now? Will these mergers take the banks to better rating in spite of the bloating NPAs? Will these banks be enabled to have more private participation in governance? Why is the Reserve Bank of India (RBI) not prepared to go out of the boards of PSBs? Has the recent demonetisation led to improving the image of the banks? The answers to all these will be disappointing.
The voice of SBI initially to wait and watch for the merger was silenced successfully by the owner, the government. Three months down the line, migration of accounts to the main platform is slow. Issues remain with human resources (HR). Poor management of loan accounts are hitting several retail and small enterprise borrowers. Managers are in agony.
Former Governor Dr Raghuram Rajan’s warning in 2016 that the merger move is risky without cleaning up the beleaguered banks’ balance sheets fell on deaf ears in the Finance Ministry. The Ministry’s red carpet treatment to multi-national asset reconstruction companies (ARCs), providing scope for sale of distressed assets, proved a failure. In the wake of global recession, even Robert Koenig called for breaking up mega banks in the interest of global financial stability.
The Indian Government did not seem to have learnt lessons from the 38 mergers that occurred before the SBI merger. The SBI Chairman, Arundhati Bhattacharya, was on record recently to say that the NPA position worsened post-merger. It would take considerable time to settle down. Anyway, she will step down shortly and the heat will be on the successor. It is not size that is the solution to the problems as much as good governance and the government maintaining arm’s length distance from the governance and management of PSBs. Bank Board Bureau and Gyan Sangam’s recommendations have thus far not proved effective.
Even among the PSBs, there are banks with regional flavour where the customer loyalties are still contributing to their image and this will for sure take a beating if they allow some weak banks to join them at the behest of the government.
I argued this in my earlier column (
‘Why consolidation of Indian banks is no cure to the ills’ ). It is also important that the big banks be more humble and learn their lessons, instead of becoming unwieldy conglomerates. Banking basics and customer service cannot be compromised. Government would do well to restart Development Banks to fund infrastructure projects and relieve PSBs from this responsibility, as experience has amply demonstrated that they are not cut out for that job due to their funding of long-term projects with short-term resources.
The recent regulation restricting exposure to a single corporate to Rs500 crore in any bank is well thought out and should restore credibility once the IBC hopefully gives a reprieve to the beleaguered PSBs. Government would do well to listen to sane advice and put further mergers on the backburner until the results of the SBI merger are out, maybe in a couple of years.
(
Dr B Yerram Raju is an economist and risk management specialist with three decades of banking experience.)
1. A good number of smaller banks are doing better than their senior and bigger players.
2. Size of the banks is not the primary issue but the good governance is the primary issue.
I also second your views on unpreparedness of merger of associated banks with SBI. In fact, this unpreparedness is not confined only to this merger but it is there in most of the issues. One of the problem with our policy makers is they try to implement their policies without establishing proper system and structures in place. (Bifurcation of Andhra & Telangana is one such classic example).
Going back to the inability to deal with many issues properly and timely by SBI after the merger, I am also one such dissatisfied customer as transfer my SB account from State Bank Patiala Thapar University branch, Patiala to SBI Yapral Secunderabad is pending for more than couple of months now.
One more point which you mentioned in your article is "choice of choosing a particular bank depends on various personal preferences and affinities". I totally agree with you. My sister's family who live in Mumbai have accounts with Andhra Bank, though it is not the closest bank to their home. But just it is "Andhra Bank". Similarly, I know why some of my friends and clients have been maintaining their accounts with other banks Viz.Citi Union Bank and others.
I want to conclude by saying that, if the proper systems and structures are not in place, then the impact of the failure in terms of the systemic risk of larger banks will have apocalyptic affects than that of smaller banks. (As you mentioned, already Arundhati Bhattacharya expressed her concern on higher level of NPAs post merger).
be strong and devoid of politics in their functioning. The politicains, bureaucrats need to keep away from these banks and they should be left to the specialists and highly skilled professionals in the field of rural financing, accounting and agro related production, marketing storage , distribution and transporting. This area requires a special regulator and promoter and NABARD which has miserably failed need to be revamped. SME sector should get an upgraded status as a major industry with all institutional, political, financial status. There should be a specialised regulator and stock exchange to exclusively cater to the needs of this segment. This requires specialsed banks which can promote, provide and support the SMES in all respects. These banks need not be of very big size, Region wise they can be of large banks . The merger and consolidation should be based on the needs of the emerging economy factoring into the dynamics of change witnessed in the domestic and international scenario. The need of the hour is to keep away polics and bureaucrats and bring in more of professionals and experts who are accountable to their repective regulators and answerable to parliament.