Shotgun wedding

The Centre’s bid to ‘amalgamate’ Bank of Baroda, Dena Bank and Vijaya Bank to create India’s third-largest bank, has finally kick-started the much-awaited consolidation within the PSU bank space. There has always been a compelling case for amalgamation of Indian banks, given the need to create globally stronger financial institutions. Even after the merger of State Bank of India with its five associate banks, Indian banks are small when compared with their global peers. There is also a significant overlap among public sector banks in terms of branches, mode of operation and clients. Mergers can no doubt bring down costs through economies of scale. However, the Centre’s big bang bank merger plan has not been driven by complementarities, growth potential or cost efficiency. Instead, the weak state of small PSBs and the Centre’s tight finances which deter massive capital infusion, appear to have triggered off the hasty amalgamation of the three PSU banks.

Herein lies the problem. Over the past two to three years, massive slippages, sharp rise in provisioning and mammoth losses have wreaked havoc on banks’ balance sheets; the story has been no different for larger and so-called stronger banks, such as SBI, Bank of Baroda (BoB) and even PNB, which is stuck with the burden of a massive fraud. BoB — pitted by the Centre as the stronger bank in the equation, capable of subsuming the weaker Dena Bank — has also been grappling with high levels of stressed assets. That the Centre infused a generous ₹5,300 crore into BoB in FY18 alone, to bolster the bank’s capital, indicates that these larger banks have also been scrambling for capital. Given the poor state of affairs at large PSBs — the Supreme Court placing an interim stay on the RBI’s February circular has only increased the uncertainty over stressed assets — it is hardly the time for the Centre to broker such shotgun weddings. The move gives a raw deal to other investors in these banks. In the past, the government infusing capital at abysmal valuations has eroded banks’ book value, hurting minority shareholders. Mergers that are used to bail out weak banks leave shareholders short-changed.

Even if one concedes that consolidation is possibly the only way to hand-hold weaker PSU banks, the Centre should have also hastened governance reforms. Taking concrete action on creating autonomous boards, for which it needs to dilute its stake to below 51 per cent, is imperative. Other constraints such as dual regulation and board constitution have to be dealt with. Creating a large bank via forced mergers is simple. Ensuring that it is globally competitive and ring-fenced from political interference, is the real challenge.

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