The big bank theory

The two-day Gyan Sangam, a forum where PSU bank executives and senior government officials meet to deliberate on issues facing the sector, ended on predictable lines. There were no concrete announcements of any kind. Instead, we had qualitative commentaries on the need to have stronger banks and the setting up of an expert panel to look into the bank consolidation process. The idea of merging small public sector banks with large state-owned banks is not new and the last thing required is another expert panel, which will only reduplicate at this stage what the Bank Board Bureau (BBB) is doing.

What is needed is to get down to the job of merging PSBs on the lines suggested by the Narasimham Committee on banking sector reforms. It recommended the use of mergers to build the size and strength of operations for each bank, while cautioning against merging of large banks with weaker ones. The history of bank mergers in India is replete with instances of weak banks being forced to merge with healthy ones at the cost of the latter; it is important that any future consolidation is market driven. The Centre should focus on operationalising the BBB in the coming fiscal, as promised in the Budget, and empower it to induct independent directors and make the strategic decisions necessary to set the PSB house in order. Only then can it prepare the pitch for true consolidation; one that will promote real synergies. The RBI’s recent Asset Quality Review has rewritten banks’ books in a way that has left PSBs, including the larger ones, with even more bad loans. At a time when large PSBs are scrambling for capital, it is unwise to burden them with weaker banks. This is not in the interest of depositors; also, it could result in the depletion of resources of stronger banks.

Instead of brokering shotgun weddings, the Centre should take concrete action on creating truly autonomous boards, for which it needs to dilute its stake to below 51 per cent. Repealing the special Acts, under which banks such as the SBI are constituted, is the first step. The Narasimham Committee stressed that the mergers of PSBs should be initiated by the management of banks, with the Centre, as a shareholder, playing only a supportive role. To retain investor appetite in PSBs following the Centre’s withdrawal, it is imperative that there is a radical change in their governance structure on the lines recommended by the PJ Nayak Committee. The Centre has to ensure that the BBB is ring-fenced from political interference. After all, ensuring an independent selection process for top bank officials is one thing; providing them with the necessary freedom to function is quite another.

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