The idea of consolidating 27 banks into probably five or ten appears to be more a knee jerk suggestion of the bankers gathered at the Gyan Sangam.
When the shareholder, who is also the sovereign, puts a gun to your head and asks you to give some suggestions for the improvement of the public sector banking system, “consolidation” seems a harmless, catchy idea to put forth.
Top officials in banking circles quickly realized that the shares of the only two good banks - SBI and Bank of Baroda - will crash if word gets around that good banks will be asked to take over weak banks.
“We are already the largest and with our subsidiaries, we will only get larger; so we won’t be taking over any of the weak banks,” a top SBI official said dispelling the notion in a hurry.
Top officials at RBI and in banking circles were also quick to add that no names have been mentioned at this stage as possible suitors and that an expert committee of bankers will go into the matter and suggest bases of consolidation.
Short point: stock investors of the couple of large PSU banks need not worry about consolidation as a show spoiler.
There are several good reasons why the government will not and cannot hurry the consolidation process.
First and most important, no one knows the fair value of these banks. The process of identifying and classifying stressed assets as NPAs (non performing assets) has just begun and it is impossible to value banks half way through the process; secondly, today the government can expect only two PSU banks – SBI and BoB - to raise some equity or long term debt on their own strength at a reasonable price sometime this year.
Why will they want to kill their chances by muddying their books by forcing them to take over some weak banks? Thirdly, if not with strong banks, what sense does it make to merge weak banks with one another?
That said, the earlier objections to consolidation are dimming. Even five years ago, well meaning experts argued that since 50 percent of the country was unbanked, the need of the hour was more regional and small banks than four large versions of SBI.
Now, with 11 payment banks and two years of Jan Dhan, digital banking has clearly emerged as a viable way to achieve financial inclusion. Also, the pointlessness of 27 government-owned banks with the same strategy is becoming obvious.
The mindless duplication of branches and products and the severe undercutting in deposits and loans apart, the sheer inability to find competent personnel, especially to man the senior levels is making consolidation of PSU banks a compelling, even unavoidable option.
Actually with the government now experimenting with private sector heads for public sector banks, the opposition from aspiring chairmen is also dimming.
Yet, it is clear consolidation won't happen in a hurry. The government has taken recourse to the expected option: an expert committee will study the matter. This contradicts everything the government has said earlier on the matter.
Last year, it said it would strengthen bank boards and the boards will look at merger options from commercial angles. Whatever happened to that promise!
Secondly, the Bank Boards Bureau will assume office from April and it has been staffed with an exemplary chairman and members. Why can’t this bureau study consolidation as well?
Thirdly and more importantly, this bureau and the government will probably have to decide on whether all banks have to be allowed to survive at all even through consolidation or whether some kind of euthanasia may have to be applied to weak banks.
For instance, south India is extremely well served with private sector banks: Federal, City Union, Laksmi Vilas, Karur Vyasya, Karnataka. It will soon have four new small banks: Janalaksmi, ESAF, Equitas and Ujjivan. The cities of Bengaluru, Chennai and Hyderabad and their hinterland are digitally advanced and payment banks may spread their net faster here. There are also some well run finance companies like Shriram and Sundaram who may become eligible for bank licences when they go on tap. Cholamandalam has already got a payment bank licence.
It will perhaps be a good idea to force Indian Overseas Bank into narrow banking i.e. deny it capital which will anyway crimp its ability to raise fresh deposits, as also force it to invest its fresh inflows only into government securities.
In a year or so, as payment banks and small banks thrive and NBFCs make loans available through digital retailers, more PSU banks across the country can be phased out through this route of narrow banking.
Of course, staff and union issues need to be thought through. But an exit policy for weak PSU banks is more important than a consolidation policy especially given the coming digital challenge.
Finally the government seems to have seriously got its timing wrong with respect to the Bank Boards Bureau and the Gyan Sangam. Would it not have been simple to either hold the Gyan Sangam after April 1 when the Bank Boards Bureau will be functional or alternatively advance the notification of the Bureau to March 1 so that the Sangam could have become a useful sounding board and starting point for the Bureau.
I am not surprised Mr Vinod Rai did not attend the Sangam despite being invited.