Prime Minister Modi has cited the move to merge Bank of Baroda, Dena Bank and Vijaya Bank as an example of timely decision-making by his government. However, there are several reasons why this move to amalgamate the three public sector banks (PSBs) may turn out to be counterproductive.
First, the amalgamation of the three PSBs has been decided through the Alternative Mechanism for consolidation of public sector banks constituted in November 2017, comprising three cabinet ministers. As per the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the Central government must consult with the Reserve Bank of India while formulating such amalgamation schemes for the banks, and place them before both Houses of the Parliament for their endorsement. The final power to decide on the merger/amalgamation scheme rests with Parliament.
Decision-making on bank mergers through the ministerial mechanism amounts to an imposition from above. This attenuates the functional autonomy of the bank boards, and could adversely impact the concerned banks’ business operations, financial health, morale of the officers and employees and the confidence of the customers.
Second, the PSBs concerned are quite diverse in terms of their size, business operations, organisational culture and financial performance. While Bank of Baroda (BoB) is a large bank with total assets worth ₹7.2-lakh crore in March 2018, it is not in the pink of its health ( Table 1 ). BoB’s return on assets was negative in 2017-18 and its capital adequacy ratio of around 12 per cent is not quite comfortably above the 10.875 per cent (end-March 2018) and 11.5 per cent (end-March 2019) earmarked by the RBI for transitioning to the Basel III framework.
Dena Bank has been under the Prompt Corrective Action (PCA) framework of the RBI since last year and restrictions on fresh credit and staff recruitment have been imposed this year because of its deteriorating financials.
Although operating profits have remained positive for all the three PSBs, BoB and Dena Bank have made net losses in the recent years on account of increased provisioning, mainly due to NPA write-offs. Despite write-offs, the NPAs of Dena Bank and BoB have continued to grow each year.
Vijaya Bank, however, has been able to maintain NPA provisioning as well as bad loans accumulation at much lower levels, which has enabled it to register positive profits. Therefore, growth of deposits and credit at Vijaya Bank have witnessed a turnaround since last year reaching 18.3 per cent and 22.9 per cent, respectively, in 2017-18.
This stands in contrast to the performance of the Dena Bank, which posted negative deposit and credit growth over the past two years, as well as the BoB, which has seen unsteady growth in the past three years.
How does Vijaya Bank, which had a positive return on assets in 2017-18, much lower GNPA to gross advances ratio compared to others and a comfortable capital adequacy ratio, stand to gain from the merger arrangement? The Union Government seems to be keen on penalising Vijaya Bank for its better performance by terminating its independent existence through the amalgamation proposal.
Third, amalgamation of the balance-sheets of the three PSBs will only alter the NPA and capital adequacy ratios through financial engineering, without helping in the process of actual NPA recovery. The process initiated by the government through the Insolvency and Bankruptcy Code (IBC) has not yielded the desired results. According to publicly available information, out of the 26 cases that have been referred to National Company Law Tribunals (NCLTs), only three cases have been settled till date, leading to haircuts of over ₹30,000 crore for the banks.
The legal regime has been tilted towards corporate defaulters, while the interests of the public sector banks are being subverted. Emphasis laid on NPA write-offs have led to burgeoning losses for the banks. What is required is an overhaul of the NPA recovery regime, which makes it more effective, speedy and transparent. Exemplary penal action must be initiated against wilful defaulters and fraudsters in order to send a clear message. Unfortunately, the political will required to adopt this course appears to be absent in the Union government.
A digression
The bank merger proposal is more of a digression, which seeks to turn attention away from the core issue of NPA recovery, in which the government has floundered.
Fourth, the notion that we have too many PSBs in India and the number needs to be brought down through mergers/amalgamations, is a prejudiced one which does not have any basis in economic theory or empirical evidence. Bank branch penetration continues to remain low in India compared to our developing country peers, which warrants an expansion of bank branches and activities. M&As, on the other hand, would cause greater concentration in banking, which will curb domestic competition and lead to reduction in bank branches. The claim that M&As always work to the advantage of all the parties and lead to synergies and greater efficiency due to economies of scale, is not borne out by evidence. The recent experience of the merger of the parent SBI with its subsidiaries has not been encouraging, which can be seen in the deteriorating financials of SBI over the last financial year.
The proposed merger of the Bank of Baroda, Vijaya Bank and Dena Bank will have added complications since these banks have no history of sharing business platforms. The organisational disruption caused in these PSBs through the merger would relegate every other activity to the backstage. The banks concerned will have to do fire-fighting for the next few years, adversely affecting other banking activities, merely in order to integrate people, processes and procedures.
The outcome may well be lower operating profits and higher net losses on account of increasing provisioning and NPA accumulation, which will outweigh any efficiency gain that is being projected. Moreover, cost-cutting measures through staff and branch rationalisation will be severely detrimental to the interests of the employees and will vitiate the industry climate.
The stakeholders in the banking system need to address these concerns while vetting the proposed merger.
The writer is an economist and activist.