PSU bank mergers: The sting of the scorpion
Mergers have been talked about for nearly two decades.
Last week, she dared to do what her predecessor, the late Arun Jaitley, or even the ‘reformist’ P Chidambaram did not — merger of state-run banks on an unprecedented scale. It might well have been due to the political power that Prime Minister Narendra Modi enjoys. Be that as it may.
Mergers have been talked about for nearly two decades. It was not just merger for the sake of it, but she also delivered on freedom to the managers to decide on strategy.
Critics, that being their job, have done quite a decent job of it. It ranges from commentary on how these mergers wouldn’t help in achieving the $5-trillion economy, to loans to the weaker sections, to reviving non-banking finance companies. In the short run, it could even slow lending.
To be sure, some of these predictions could even come true but not necessarily all of them. But the fact is that analysts and the regulator have been pressing for it whenever an opportunity arose. One argument that couldn’t be ignored was that one shareholder owning more than 20 companies to do the same business! It was due to historical reasons though. But it is getting corrected.
It is an admirable move to provide so much freedom to bank boards and give them a free hand to hire a risk officer and empower him to even veto loan decisions. Important portions of the Nayak Committee recommendations are being implemented. Is it enough?
One obstacle in deriving the best out of state-run enterprises is blurring of the role of an administrator and that of a shareholder. The administration comprising the politicians and bureaucracy looks at these companies as a ward of the state to execute its social policies or use them as a piggybank to raise resources. A painful lesson of yesteryears is the near Rs 3 lakh crore of taxpayer money that has been sunk into these banks. IDBI Bank, which received more than Rs 20,000 crore from another ward of the state Life Insurance Corp, is getting another Rs 9,000 crore.
While this government has been conscious of not interfering in the sanctioning of big-ticket loans, it has to be mindful of nudging banks to carry out its agenda of financial inclusion and more.
The Jan Dhan bank accounts have been the single biggest achievement of this government and it wouldn’t have been possible without the push from the government. So is the case with Mudra loans, the credit given to self-employed and tiny entrepreneurs.
These projects involve a cost for the banks. Did the government compensate these companies for their servicesRs This puts them at a disadvantage to private peers, which don’t share the costs but derive the benefits. What about the credit guarantee scheme for non banking finance companies? Even here, it is the state-run banks which had to come to the financial system’s rescue.
While the finance minister addressed many broader issues, these nagging ones remain. Getting bigger does not automatically make them better. Can the boards really make a difference in evaluating a strategy that would make them stand outRs Even if they do, will the bureaucracy behave like a shareholder or an administrator?
If one looks at the rate-cut transmission debate, it is pretty clear that it is the state-run banks which are bearing the brunt when they grudgingly linked some lending with benchmarks. While there may be no orders to cut rates as in the past, these kinds of ‘nudge’ can neutralise their freedom. No wonder, investors have given thumbs down for a banner reform. The Nifty PSU Bank index is down 4.9 per cent.
Whenever a reform transfers the power from bureaucracy, it always comes up with a clause that would nullify most of it. Is it different this time?
The ‘sting of the scorpion’ lies in the proposal that ‘specialised agencies’ would monitor loans above Rs 250 crore. If bank managements are professional and independent to charter their strategy, what are these agencies for?