The final results of the public sector banks (PSBs) for fiscal 2015-16 have been declared. The results, as expected, were poor and the government, being owner of PSBs, has been paying utmost attention to the banking situation and initiating various actions such as strengthening the selection process of the top management, setting up a stressed assets fund and recovery tribunal, and legislating a bankruptcy code.
Finance Minister Arun Jaitley observed that the losses by banks were mainly on account of higher provisioning of bad loans, especially in the last two quarters, in well-known stressed sectors such as infrastructure, steel, and textiles, and that the government has sufficiently empowered banks to recover their dues. The Reserve Bank of India (RBI) has also initiated major policy steps to help PSBs to maintain robust books.
Charan Singh The key factors for the gloomy performance of commercial banks are both global and domestic. Globally, world economies are recovering slower than expected, and oil prices are beginning to rise again. Domestically, though India is a bright spot in the world economy, growth is below its potential.
The government has already allocated sufficient funds to recapitalise the banks over the next few years. But when it is time to consider whether the taxpayer has to bail out PSBs and write off their losses, should the employees, including the top management, of a loss-making commercial bank not share the cost too?
Merger as an expedient In pursuing the objective of consolidating banks, the government has announced that State Bank of India (SBI) and its associates would be merged. Earlier, in 2009, the Rakesh Mohan-led Committee on Financial Sector Assessment had proposed that the RBI should create a conducive environment for mergers and amalgamations. The merger of PSBs had been recommended even earlier in 1998 by the M. Narasimham-led Committee on Banking Sector Reforms. Still earlier, restructuring of Indian banks through merger and acquisitions had also been recommended by other committees since 1972. Thus, issues related to consolidating the Indian banking sector have been debated and discussed for many years and merger has been a preferred recommendation consistently.
Globally, the Southeast Asian crisis of 1997 had encouraged consolidation and restructuring of banks in many Asian countries. In the U.S., there has been consolidation of banks since 1916. In India, many banks in the past were merged with other banks. Illustratively, New Bank of India and Punjab National Bank, both PSBs, were merged in 1993. Similarly, State Bank of Saurashtra and State Bank of Indore had merged with the SBI in 2008 and 2010, respectively. Theoretically, key reasons for merger are economies of scale and scope, revenue enhancement, value maximisation, efficiency gains, cost savings, diversification of customers and assets, and also that large banks help in international recognition. Therefore, the decision to merge SBI and its affiliates is a step in the right direction.
Mergers, in general, are a challenge and have to be carefully crafted. It is important to consider the strengths and weaknesses of eligible PSBs before binding them together. Mergers can be successful in similar institutions with a similar culture but cannot be extensively adopted because they lead to job cuts, branch closures and, in some cases, lowering of quality and quantity of services. That is why mergers have always been considered as only one alternative to consolidation.
Privatisation as an alternative In addition to mergers, the government could consider other alternatives. The loss of Rs.18,000 crore incurred by PSBs has implications for the national exchequer. On the one hand, the government foregoes revenues through dividends and profits, while on the other it would need to provide resources through enhanced expenditure to bail out loss-making banks from a pool of resources garnered from a small subset of population — taxpayers. The government could consider setting standards for the banking industry — privatising some of the inefficient PSBs while rewarding profit-making ones. This implies that the 60-year-old policy of social control needs to be reviewed. One of the objectives of social banking under which private sector banks were nationalised in 1969 and 1980 was to ensure banking penetration in rural areas and to avoid a nexus between industry and banking.
In the past two years, the Central government has been successful in ensuring a bank account in every household under the Prime Minister’s Jan-Dhan Yojana. The advancement in technology is already making possible safe banking transaction through mobile phones. In a digital India, and with widespread availability of credit rating, bank accounts, Aadhaar information and mobile phones, technology can help in eliminating human intervention in sanctioning and extending credit to the borrower. Small banks and payment banks are expected to penetrate deep into rural India, and therefore the need for a brick-and-mortar commercial bank branch is diminishing.
Privatising loss-making PSBs will have a deterrent effect on the staff and management of such banks. Also, privatising a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs. As the Planning Commission was a vestige of the socialist era, so is social banking. It is time to reconsider whether PSBs, all 27 of them, are really required to serve the purpose of social banking in our country and at what cost.
Charan Singh is RBI Chair Professor of Economics, IIM Bangalore.
