Mergers or no mergers, so long as the owner directs the banks what to do and what not to do, no professionalism and efficiency that is required for their long-term sustainability can be expected in PSBs.
As a part of the present government’s reform-agenda, Finance Minister Nirmala Sitharaman has recently announced merging of 10 PSBs into four banks to usher in efficiency in their management and also create ‘big next generation banks’ which could by virtue of their resulting national presence and global reach and with a bigger risk appetite, expand the much desired credit flow to boost growth. At the same time, the Finance Minister has also assured bank employees that there would be no retrenchment of workers owing to the proposed mergers.
These strange pronouncements pose an obvious question: Will the move enable the government to accomplish its stated objectives? An honest answer would be a ‘no’ for reasons galore. Let us now examine them one by one. Essentially, mergers involve restructuring of organizational setup which obviously involves staff reduction to realize the anticipated synergy benefits. Strangely, the government thinks otherwise. But the fact remains that so long as the government, the owner of the PSBs, continues to dictate what they can and cannot do, the past woes would continue to haunt them.
Take the case of the recent direction that the Finance Ministry gave to banks: that all banks are to put up Shamianas in 400 districts in association with the NBFCs partnering with them to grant loans to retail, agriculture and SMEs, obviously to pump-prime the economy. Banks are even asked to bring in “five new borrowers for every one existing customer”. What does it mean? Catching up with these directives would simply mean banks side-stepping the scientific credit appraisal process—proper identification of the prospective borrower, assessment of his creditworthiness, careful due diligence of the proposed purpose of the loan and its ability to generate sufficient cash flows to service the debt besides leaving a fraction of profit with the borrower to incentivize his involvement in running the venture and sustaining its growth—and liberally granting loans to whoever calls at these melas.
Over it, the Finance Minister has also said that no MSME stressed loan be classified as NPA until March 31, 2020. It means that the banks should restructure these bad loans so as not to declare them as NPAs. Such ad hoc regulatory dispensation would spoil the credit culture, just as it had happened due to the waiver of farm loans by certain state governments. Here it is worth recalling one such regulatory forbearance imposed in 2008-09 that enabled banks to sweep bad loans under the carpet by repeatedly restructuring big ticket loans indiscriminately, the effect of which is still haunting the system in the form of bad loans. The present directive is all set to create such a mess once again. The only difference would be that in 2008 it was big ticket loans for corporates, whereas under the present directive it would be small loans but in large numbers, and the effect remains the same.
There is yet another lurking danger behind this whole exercise: with the falling personal incomes all around owing to poor economic growth in the country, people/businesses are likely to be tempted to borrow more from banks/loan melas to keep up their spending levels intact, irrespective of their credit absorption capacity. Should that happen, the borrowers from agriculture and MSME segments who are less resilient by virtue of their having very little to fall back in the hour of financial crisis are certain to suffer more from overleveraging.
That said, it must also be admitted that involving financial system to facilitate economic growth and poverty reduction is supported by overwhelming evidence from both cross-country and country-specific studies, but not granting of loans en masse. Secondly, the government might be thinking that pump-priming economy through banks would not disturb its fiscal math. But it should bear in mind that it is only a temporary relief, for all this is certain to fall in its lap again, once loans granted in melas turn NPAs demanding for infusion of fresh capital from it, of course, at a future date.
Besides the owner, even the regulator of banks, RBI has given recently an order which is equally disturbing: it directed all the banks to link all floating rate retail loans and loans to micro, small and medium scale enterprises to one of these four: RBI policy repo rate, Government of India three- or six-month treasury bill rate, or any other benchmark market interest rate published by the Financial Benchmarks India. Traditionally, banks price their loans based on the cost of their deposits/source of funds to keep their net interest margin stable. But the present dictate puts banks in jeopardy, for they have to price a part of their assets anchoring against an external indicator while not being permitted to do so on the liabilities.
Besides this freshly imposed burden, PSBs are already suffering from a high legacy burden of NPAs that have peaked to 15.6% of state-owned banks’ total loans. Incidentally, five of the banks in the merger list itself are already under the RBI’s Prompt Corrective Action (PCA) Plan as a large chunk of their capital has already been wiped out by bad loans and another three out of the remaining five are likely to be placed under PCA Plan soon. That being the current health of these banks, they cry for: reforms in governance for delivering the intended results.