Why Merge Public Sector Banks?

As the Union Cabinet pushes for public sector bank (PSB) mergers based on the assumption that efficiency will improve through economies of scale and scope, through our archives, we look at whether this is actually the case.

First, there is a need to understand the recent merger of the State Bank of India (SBI) with its associate banks in the context of PSB mergers in general. The SBI would have preferred undertaking this merger at a time when the non-performing assets (NPAs) of its associate banks were lower than the current high levels. After the merger, the proportion of debt in the combined balance sheet of the SBI has gone up. Timing matters for mergers. Merging at this time will tend to mean higher concentration of debt. It will also mean less time to pay attention to the process of merging organisations, which in itself is a complicated exercise of managing new resources, expertise and streamlining working cultures. The focus for banks today must be debt recovery. 

  • R Krishnamurthy (2017), explains that while there is a rush to find a quick solution to the non-performing assets problem by merging PSBs, it would be wise to examine the ground realities closely. India needs a mix of efficiently run PSBs and aggressive private banks to achieve growth and development along with social justice. 

 

Second, have bank mergers in general improved efficiency? Have mergers helped PSBs meet their aims better?. 

  • Banerjee (2017), through an econometric analysis of India’s scheduled commercial banks, elaborates on how PSBs were set up to serve the welfare needs of the underprivileged and to promote financial inclusion, not to make profits. In the case of bank mergers, economies of scale and scope are being used to veil the promotion of economies of exclusion.
  • Sofia Devi and T R Bishnoi (2015) examine the performance of banks after mergers post 1991. They find that there is no significant improvement after mergers is in a majority of cases, though there are a few exceptions. Therefore, the strategy of mergers and acquisitions to consolidate banks for purposes of efficiency seem flawed. Future banking policy must take note of this empirical reality and long-drawn experience of the past two decades.

 

The government and some in the Reserve Bank of India believe that PSBs must give way to privately owned banks. Such understandings endorse the idea of privatising PSBs.

  • C P Chandrasekhar flags this tendency in his May 2017 H T Parekh Finance Column article. He interprets Deputy Governor Viral Acharya’s case for re-privatisation against the background of the history of the banking sector in India.
  • T T Ram Mohan, who also writes for the H T Parekh Finance Column, in his October 2016 article scrutinises the present government's commitment to recapitalising banks, and argues that this government does not have a  clear vision for PSBs, and also cautions against mergers that will only end up weakening banks at this time.

The government has made an inadequate commitment to recapitalise banks. Much more is needed.

 

 

Representational image. Image Courtesy: Tulika Bhattacharya: Instagram/@billie_jean_07

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