Quick Take | PSU bank merger: When the government is a risk factor

It’s a mug’s game to invest in government-owned institutions. The goal of a state-owned institution varies from serving underserved areas to providing jobs. Profit making is incidental. Moreover, the promoter, the government, is free to plunder reserves of a company it owns, arrange shotgun marriages between any of them, all without consulting the minority shareholder.

The upshot: investors in state-owned banks, who seem to think that a new era is dawning with recognitions of bad loans over and that things will get better, would do well to mull over the consequences of Bank of Baroda’s merger with Dena Bank and Vijaya Bank.

Bank of Baroda shareholders seem to have got a sweeter deal, but then that’s the price they have to pay for the bitter pill of Dena Bank’s NPAs. There’s no guarantee that they will be compensated with higher returns after the merger takes place.

Mergers and acquisitions are always tricky, but state ownership of these institutions will make success that much more elusive for this particular union. In the first place, it is still unclear what the government hopes to achieve.

Synergy, that favourite word of investment bankers who get fat fees for brokering such marriages, would be difficult to achieve precisely because they are state-owned enterprises. For instance, will the merged entity be able to shutter branches? Will it be able to lay off, or at least offer a premature retirement package for some staff to save on employment costs? PSU bank employee unions are already crying foul and gone on multiple strikes.

Will such a merger be effective in preventing such a massive NPA pile-up in the future? For that lending, habits have to change. Two months ago, in its analysis of the top 100 bank frauds in India (most of which took place in state-owned banks), the central vigilance commission showed up the lacunae in the credit appraisal and monitoring process, the same things responsible for NPAs.

It’s easy to blame PSU bankers, but the buck stops with the owner. When bankers are under repeated pressure to do directed lending and not incentivised for doing things the right way, it’s almost a miracle that the system has not already crumbled.

This year is the 50^th anniversary of bank nationalisation. It’s a good time to assess and ponder the future. While outright privatisation will be the best option, the least the government should do is consider overhauling  governance and management structures at PSU banks. A truly independent board, which should ideally take calls on mergers, would be a good first step.