top of page
Vinay Nair

Will the Merger of PSU Banks Be Enough to Salvage the Indian Economy?

For most Indians today, the most common and yet contentious topic to discuss over a steaming cup of tea is the state of our economy. With numerous memes doing the rounds on social media and every other newspaper headline dissecting the dip in the #Indianeconomy, it is nearly impossible to escape the debate raging around the issue. While humour may be a great coping mechanism otherwise, the memes are not doing much to allay the simmering apprehensions about our collective livelihoods in the days to come.

Unfortunately, if a section of the experts are to be believed, the finance minister's lacklustre attempts to revive the fledgling economy aren't doing much to that effect either. It has been nearly a week since Indian Finance Minister Nirmala Sitharaman announced the second set of measures to be implemented for reining in the downturn that has afflicted the Indian economy of late.


While many economists have hailed the decision to carry out strategic mergers to collate 10 major public sector banks into four larger, stronger ones, there are many that are still quite torn about what it means for the fate of our struggling economy.


According to the announcement,

The first of the four new banks will be formed by merging three banks that use the Finacle Technology Platform. These are the Punjab National Bank, the Oriental Bank of Commerce and the United Bank.

While the first of these has a risky situation as far as its capital is concerned, the second and third have both recently had stints under the central bank's Prompt and Corrective Action, with the United Bank still being under the PCA.

The second merger will involve an amalgamation of Canara Bank and Syndicate Bank, both of which use the iFlex core banking platform and have similar financials.
The third group will consist of the Union Bank, Andhra Bank and the Corporation Bank, all of which use the Finacle platform like the first group.
Lastly, Allahabad Bank and the Indian Bank will be merged to form the seventh-largest public sector bank in India.

Considering that this will bring down the total number of public sector banks to 12 from what was 27 just a couple of years earlier, it is undoubtedly a major move to overhaul the current state of the economy.


To understand the effects of these mergers, it is imperative to ascertain the rationale that guided the decision. The idea behind the move was to implement more efficient economies of scale and ensure an optimum utilisation of the 70,000 crores rupees that the government is planning to pump into the banking sector by way of recapitalisation.


As the Minister explained in her announcement,

This move is meant to create a set of "next-generation banks" that would eventually pave the path for the Indian economy to be valued at $5 trillion over the next five years.

She also harped on the fact that government measures had successfully brought down the NPAs being borne by the public sector banks over the last year.


Of course, there are definitely certain upsides to her move. Seeing how rare it can be to come by some good news these days, it is probably best to first look at the brighter side of affairs so far as the FM's latest announcement is concerned! As former SBI chairman Arundhati Bhattacharya has already pointed out in support of the announcement,

A merger will make it easier for public sector banks to recoup the massive investments made on burgeoning compliance and technology requirements.

As lower returns are infeasible for small banks to work with, the proposed merger effectively widens the scope for these banks to reap the benefits of technological advancements as well as the proposed recapitalisation.


As the Finance Minister spelled out in the press conference itself,

  • The move will also enable banks to constitute more effective and accountable boards at their helms. What this essentially means is that having fewer banks will allow for them to make better use of the talent available. In turn, they will now enjoy more efficient management by both the board members and mid-level managers.

  • Not only will this entail an improvement in the quality of managers and administrators running the banks, but it will also compensate the top level decision-makers better, encouraging a greater commitment to administering the banking operations effectively.

  • Naturally, this will boost recovery, improve loan monitoring and streamline the process of overseeing end-use of funds.

  • Larger, board-driven banks will hereby exercise greater autonomy in taking decisions, which will naturally cut down on time and costs as well.

While all of this sounds quite rosy, to understand how well it will end up working, it is important to take stock of how it is expected to actually impact credit flow in the economy.

Truth is, given how the market is fast heading towards a stagnancy, it is unlikely that the bank mergers will boost credit flow and salvage the downtrend anytime soon.

The decline in the rate of credit growth has been caused by a number of factors, which include but are not limited to,

  • the slowdown in the automobile industry,

  • lowered rates of growth enjoyed by private banks and

  • a significant reduction in the banking sector's risk appetite.

While the public sector mergers might potentially heighten the risk appetite somewhat over the course of at least a couple of years, it is hardly enough to account for all the factors that have caused our economy to take a tumble.

At this juncture, a strategy to revive the banking and financial sectors must essentially include a plan to facilitate a higher credit flow to non banking financial companies (NBFCs) as well.

However, if one considers the fact that the four merged banks will already come with more than ten percent of their loan exposure being towards the NBFCs, the liquidity crunch of the latter is unlikely to be alleviated as a result of the mergers.


Besides, even though the FM did assure unions that the mergers will not result in loss of jobs for any of the bank employees, the move is definitely set to lower the rate of bank recruitments in the coming years, which will only make the problem of employment generation more complex and difficult. Even if we were to discount the flip side to the decision to merge these banks, it would be a while before we would see the benefits of the move.

In the short run, the convoluted process of integration will cause further complications for the market, which is something I do not think we are in a position to afford, while our economy fast heads towards a crisis situation.
In the long run, the upsides to the measure can quite possibly trump the concerns that are plaguing us in the short run.

However, considering that our government took a while to wake up to the reality of our declining economy and lost so much time in the process, I am not sure we have much time to experiment with long term measures without installing cushions that can protect the economy from a fatal dip in the near future.


Essentially, as I have argued in my previous article, An Open Letter to the Finance Minister of India, it is imperative to account for both structural and cyclical elements in our economy's downturn.


As I see it, the only way to salvage the economy from its critical state would be:

  • to take care of short term requirements with greater urgency,

  • while introducing long term measures gradually alongside.

Comments


logo_edited.png
DO THE FIVE.gif

DO THE FIVE

Help stop coronavirus

  1. HANDS Wash them often

  2. ELBOW Cough into it

  3. FACE Don't touch it

  4. SPACE Keep safe distance

  5. FEEL sick? Stay home

General Public Health Information

World_Health_Organization_logo_logotype_
logo-google-404px-grey.png
Logo of Nair Ventures.png