On 30 August, Finance Minister Ms. Nirmala Sitaraman while addressing a press conference announced the consolidation of 10 public sector banks to carve out four large public sector banks. The background of the announcement was that of a full-blown economic crisis and a brewing crisis in the financial sector.
Over the last several years, Public Sector Banks (PSBs) have been struggling hard to come to grips with mounting Non-Performing Assets (NPAs). Now, PSBs are struggling at the core of their business, which is credit offtake. On NPAs, the government claims that with the Insolvency & Bankruptcy Code (IBC), it has contained the issue since NPAs have gone down significantly. Figures of NPAs as of March 2019 as against 2018 are being quoted to support this claim. In terms of IBC, 23 big corporate NPA accounts were referred to the National Law Company Tribunal (NLCT) with a total claim amount of Rs. 1,37,745 cr. as against which Rs. 63,982 cr. has been recovered with the sacrifice of Rs. 73,763 cr. – i.e. 51.63 per cent of the claim amount. The data is as of Dec. 2018 and covers only those companies which have total claims of more than Rs. 500 cr. The numbers are reported in an analysis of two years of IBC titled “Whose Loss, Whose Gain?” published by the Centre for Financial Accountability, New Delhi.
In the process of consolidation, now the focus of banks will be shifted from recovery, which is an urgent need of the day, to streamlining the merger and its working by addressing the issues in relation to technology platform, branch rationalisation, man power integration etc. As a result, the first causality will be recovery of NPAs. Thus, consolidation of public sector banks in no way is likely to help banking to come out of the crisis.
The data makes it amply clear that what we have on hand is nothing short of an amnesty scheme for big corporates. NPA figures as of 2015 stood at Rs.1,92,809 cr, rose to Rs.6,16,586 cr as of 2018, and fell to Rs. 5,66,791 cr as of 2019 but this has been achieved only with write offs and sacrifice in NCLT and compromises under one-time settlement schemes devised by board-driven policies of the respective banks. In 2019, in one single year, PSU banks have reduced NPAs through write offs and compromises amounting to Rs. 1,24,296 cr. Whatever explanations may be provided by banks or the finance ministry, from the perspective of the ordinary citizen this reduction in NPAs is nothing short of accounting jugglery with banks sacrificing in favour of big corporates. As revealed by the government, the amount involved in cases pending in Debt Recovery Tribunal (DRT) is more than Rs. 6 lakh cr. In most of the DRTs, either the presiding officer or the recovery officer is not posted, and resultantly DRT mechanism for recovery has become an utter failure. Same is the case with the NCLT formed under IBC, in which recovery comes forth only if banks are prepared to sacrifice, and if the bank is not ready for a heavy haircut, the case ends up in litigation.
In the process of consolidation, now the focus of banks will be shifted from recovery, which is an urgent need of the day, to streamlining the merger and its working by addressing the issues in relation to technology platform, branch rationalisation, man power integration etc. As a result, the first causality will be recovery of NPAs. Thus, consolidation of public sector banks in no way is likely to help banking to come out of the crisis.
Today, with the implementation of the Pradhan Mantri Jan Dhan Yojana and other social sector insurance schemes, pension schemes and disbursement of all sorts of subsidies through banks, branches of banks have acquired renewed importance. We need more number of branches but consolidation will take it in reverse gear. Banks are likely to close branches wherever there is an overlap. As evidence shows, following the merger announced last year, SBI has closed more than 1,000 branches while Bank of Baroda is in the process of closure of 500 branches. The new merger will likely lead to another 2,500 to 3,000 branches being closed. Thus, this consolidation is likely to prove to be counterproductive.
Each bank has its unique history, geography and culture, too. In the process of the mega merger, the banks will lose everything that goes to their roots. Those institutions are built with the sacrifices of generations and will lose their identity overnight. This is likely to be painful not only to the employees and officers but also to the customers who in India still rely on relationship banking.
With the advent of new policies, successive governments have repetitively attempted to privatise public sector banks but have been resisted by bank employee unions and the Left and democratic organisations. To obviate this, the government has issued licenses to a new generation of private sector banks who have snatched away business from public sector banks in last two decades to the extent of 20 per cent to 25 per cent, which comes to around Rs. 46.84 lac cr. This was a step that began with the advent of a new banking policy way back in the year 1991 that successive governments pursued which now has been accelerated. Now again, the government has issued licenses to payment banks, small finance banks and universal banks in the private sector and has announced an “on tap” policy, which means these licenses will be issued routinely.
Thus, a government which could not privatise the banks has succeeded in privatising the business. In the process, all those private sector banks are able to have inroads in tier-two and tier-three cities, where till yesterday public sector banks had a monopoly. Private sector banks have realised that the new potential for real business is at the bottom of the pyramid i.e. in mobilising low cost Current Account and Savings Account (CASA) deposits and retail advances wherein yield in advances are more than what can be got from the corporates. In the process of this consolidation and consequent branch mergers, space is being made available to private sector banks. The fear is that after consolidation, this government may go in for privatisation since the present political dispensation at the Centre has a robust majority in Parliament. Let us not forget that this is the same political dispensation which had opposed bank nationalisation, which for the first time was done way back in the year 1969.
In the developed world, demergers are the flavor of the season after the global financial crisis of 2008 and the realisation that some institutions can become “too big to fail” and become a systemic threat. This merger is neither demanded by the employees and officers nor by the customers or the shareholders but is being driven by the government who all the while talks about autonomy of those banks.
Those banks which are being merged have a long history of about seven to eight decades. They are the product of the national movement and the Swadeshi movement and in case of some of the banks reorganisation of States based on languages. Each bank has its unique history, geography and culture, too. In the process of the mega merger, the banks will lose everything that goes to their roots. Those institutions are built with the sacrifices of generations and will lose their identity overnight. This is likely to be painful not only to the employees and officers but also to the customers who in India still rely on relationship banking.
In the developed world, demergers are the flavor of the season after the global financial crisis of 2008 and the realisation that some institutions can become “too big to fail” and become a systemic threat. This merger is neither demanded by the employees and officers nor by the customers or the shareholders but is being driven by the government who all the while talks about autonomy of those banks. This is a great mockery.
Thus, this consolidation is neither in the interest of banking nor in the interest of customers nor in the interest of share holders of those banks. It is purely to serve the interests of large corporates who are the root cause for the present crisis in banking.
( The writer is a former Director of the Bank of Maharashtra and Joint Secretary of the All India Bank Employees Association)