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Reanimating PSU Banks

Merger alone would not make PSU banks start running again

TIME will tell if the decision of the central government, announced by Union Finance Minister Nirmala Sitharaman last week, to merge 12 banks to form four entities will bear the fruits they expect it to. The problems facing the banks under question in particular and the public sector banks in general are serious and seem insurmountable. The idea behind the merger is said to be to reposition public sector banks to take the economy to the $5-trillion mark with wide-ranging reforms. The government says it would make banks financially stronger and smart lenders conducting technology-driven banking. There is no doubt in anyone’s mind that the decision of merger has been taken in view of mounting non-performing assets (NPAs) owing to the failure of banks to recover the advances made to business houses that turned defaulters willfully or otherwise.  However, it is difficult to say whether the merger would bring about a change in the scene of NPAs collectively for the four entities.

Merging of public sector banks is nothing new. It began in 1991 when the Narasimham Committee recommended merger in a three-tiered structure by size to give public sector banks a fighting chance to compete against foreign players. New Bank of India was merged in 1993 with Punjab National Bank. However, the conditions then were not what they are now. Today every PSU bank faces an existential crisis owing to the NPAs and erosion of liquidity.  According to the views shared by bank officials, the latest merger is not going to be easy as different banks follow diverse systems.  Their amalgamation would not be smooth. It could take years to mainstream their functioning which could affect bank performance. There are no easy ways of resolution of NPAs. The merger might actually slow down recovery as understanding and tackling of NPAs of other banks by officers of a bank could be clumsy and misdirected and counter-productive. Loan departments of different banks work differently.

The Union Finance Minister assures there would be no job losses following the merger. However, the assurance might not work in the actual situation. There are various levels of competence among officers and employees in the banks merged to four entities. Different banks use different technologies, and the familiarity of officers and employees with technology might not be at the same level. The staff of one bank might find themselves at sea working in a totally alien system of the superior bank which will affect their performance. In this era of rationalization, there is no room for giving officers and employees a long time for adapting to a situation. There is a growing tendency among bank managements to evaluate performance to give promotion or retain an officer or employee in a job. 

It is true that the integration of subsidiaries of State Bank of India was smoother. But that was because the associate banks followed one single system. However, most banks now merged follow different systems; so integration, uniformity and streamlining would pose a big challenge before each of the four entities are able to establish smooth business processes, if they are able to establish them at all. We will have to see if one of the prime objectives of merger, which is to reduce the burden of bad loans, is achieved in a few years. The second objective is to increase lending capacity, which would depend both on management of NPAs as well as mobilizing of deposits. As of now, banks have fallen back to conservative ways in lending, causing a liquidity problem. They have to come out of their shell if the economy has to stem its decline. After all, the ultimate aim behind merger is to help the banks consolidate their capital status to improve their efficiency in order to help the economy grow.  It is sad to note that a sizeable amount of capital of PSU banks provided for securitization of loans has been eaten away following loans amounting to thousands of crores of rupees having gone bad. The government efforts to recapitalize banks by giving Rs 2.46 lakh crore failed to yield the desired results. Merger alone would not help: the government must take bolder decisions on helping the banks recover loans.

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