Bank merger panacea

Merging a nationalised bank or a clutch of them with another nationalised bank makes eminent sense given the fact that at the end of the day the controlling interests of all these banks vests with the Central government.

Why should a person compete with himself? Ideally, there should be only one government bank which perhaps is the path the government has charted out for itself for the long run. In terms of product differentiation, staff orientation and technical prowess, there is little to distinguish one PSB from another. Hence, the government is right on melding them together so that their resources are optimally utilised.

But merging a flailing, floundering bank with another is an altogether different matter. Ramesh Gelli, founder of Global Trust Bank, hasn’t been heard of ever since his bank was merged with the Oriental Bank of Commerce (OBC). Will the same now happen to the promoters of the Karur-based Lakshmi Vilas Bank (LVB) now that it is going to be merged with the Indian subsidiary of the Singapore-based DBS?

Advantage DBS?

To be sure, DBS would not have agreed to this arranged marriage brokered by the RBI had it not got the better side of the bargain. It currently has just over 30 branches in India, while LVB has more than 550, and 900-plus ATMs. DBS, which has a market value of about $47 billion, will inject ₹2,500 crore into its India subsidiary for the proposed merger.

Indeed, LVB branches are its crown jewels which DBS has coveted. The merger will accelerate DBS’s expansion in India and potentially transform it from a largely digital bank in the country to one with hundreds of branches. That the LVB staff would need extensive reorientation to adopt digital banking and loan appraisal skills will be the challenge going ahead.

The depositors of LVB too would be happy as they won’t even suffer minor bruises with the moratorium on withdrawals beyond ₹25,000 being just a passing cloud. So, it all boils down to this insofar as policy prescriptions are concerned for addressing banking malaise in India — merger.

Merger seems to be the panacea for banking ills in India except that when a PSB is in trouble it has an alternative palliative — fresh capital infusion from the Centre, which is often seen as case of “good money going after bad”. Both merger and fresh capital infusion gloss over the deeper malaise plaguing the Indian banking sector.

The Insolvency and Bankruptcy Code (IBC) was admittedly the first measure that put a semblance of fear into the cavalier attitude of corporate borrowers. The IBC, with its threat of dethroning the incumbent promoters, has the potential to discipline borrowers but has sadly been put on hold due to the pandemic.

One hopes the RBI does not rest under the smug feeling that LVB travails are over now that a suitor has been found. It should initiate steps to find out if there were any instances of malfeasance in bringing the bank to the brink.

It is a fallacy to say that bank executives would stop lending and prefer the safety of gilts and treasury bonds if the CBI is let loose. While witch-hunting must be eschewed, playing fast and loose with public money should never be glossed over.

The writer is a Chennai-based Chartered Accountant