HOW CAN CONSOLIDATION STEM THE NPA ROT?

So the BIG bank consolidation is taking shape. Thanks to approaching 2019, so many pending ‘things-to-do’ are finally seeing the light of the day!

Merger of Vijaya Bank, Dena Bank and Bank of Baroda (BoB) would probably have been the most shared news on Whatsapp yesterday evening and why not, it is big news indeed!

People are yet mixed about this proposed merger, customers confused but the market has already concluded that BoB is at the biggest disadvantage while Dena and Vijaya Bank are gainers. BoB is the top loser on the BSE since opening bell, going down 14% to Rs.116.50. On the other hand, Dena Bank was frozen at the 20% UC the moment it opened for trading at Rs.19.10. Vijaya Bank rose over 10% at Rs.66.

Following the proposal, two brokerage houses went on to downgrade BoB while Dena Bank has received a thumbs up as it gains the most – it is currently under RBI’s prompt corrective action (PCA) framework and once merged, will be back to being a normal/routine operations.                

The net NPA ratio of Dena Bank is at 11.04%, BoB at 5.40% and 4.10% for Vijaya Bank. As against this, the combined entity will have net NPA ratio of 5.71%.

The FM, Arun Jaitley said the government did not want a merger of weak banks and has, therefore, suggested the idea of amalgamating one weak bank and two strong banks, in order to create an entity which is able to increase banking operations. This also indicates the approach that the government may deploy in future consolidation.

Well, this is the art of packaging; the news has been packaged as the most necessary thing to do to reform the banking sector. But the truth is that this merger is like using a Band-Aid to heal an amputated leg. Dena Bank is a laggard and to resolve its NPA issue, this has been worked out as the best solution. The question is – can we really resolve NPA issues by merely merging banks and creating BIG banks?

This is the Govt’s best way out at the moment. It might look like a reform but is it really? The Govt has stake in 21 banks out of which 11 are operating under the PCA framework. These 21 banks account for 90% of the NPAs in the banking sector. So the problem is not about having plenty of banks; the problem is the way in which these banks are run. These three banks will get merged and yes, it would mean the RBI would have to look into the books of one bank and not three. But how does that guarantee improvement in efficiencies or reduction in NPAs when the political clout of the Govt remains the same? The Govt is merely paring its owner from three different banks to one bank but its interference will remain. How does anything change then?

Also remember this – all the three banks employees will be retained. The merged entity will now have almost 86,000 employees to contend with. But what the merged entity will have is a balance sheet of 14,82,325 crore and deposits of 8,41,830 crore. CASA ratio is at 34.06% and this is good as it indicates lower interest outgo.

Creating a bank which is too big to fail is certainly what the govt thinks will fix the problem of NPAs.  Actually, the debate should not be about big bank or small bank. It has to be whether this till help stem the rot? Begin from examining why the Govt need its representatives on PSU boards? How are they contributing to the growth of the bank? The CEOs unfortunately have to spend a lot of their precious time in looking at the way in which the political wind is blowing, kowtowing with ministers and their secretaries rather than concentrate on the business at hand. Those working in some of the PSU banks confer that their banks rarely and in some cases, never talk about business strategy of the bank in each city, no talk on clients and sectors to avoid, target criteria for clients and sectors; no research goes into the working; it runs traditionally, adding mere computers and ATMs and online banking has given them the appearance of moving with times; internally though it’s all very much the same.

Currently the PSU banks are still reeling under the stink of NPAs. This is the pain we will have to endure for the rot of corruption in the banking system. Not big or small, a change in the entire value system of India is needed but that seems like an impossible task…