about 2 years ago
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By Ruma Dubey


Banks having too much bad debt on their books? NPAs are an issue? The Govt has found a way out – merge them and create one big mammoth bank. Will that change the rise of bad debts or bad decisions? Not really.

The Govt has reportedly mooted the idea of merging four PSU banks - Bank of Baroda, IDBI Bank, Oriental Bank of Commerce and Central Bank of India.

The merger is expected to create one large bank – the second largest after SBI with combined assets of over Rs.16.58 trillion. But all four together also have a loss of Rs.21,646 crore at end of FY18.

Apart from cutting down the picture of so many banks having NPAs, the Govt is hoping that the merger will allow weak banks to sell assets, shut down loss making branches and yeah, reduce overheads. You think, a PSU bank trade union will allow reducing the work force? They don’t allow PSUs to list on the bourses, how does this happen?

And frankly the question that needs to be asked is whether it helps creating such a big bank? Creating too big a bank to clear this mess is simply no solution. What is indeed required is reduction of interference by the Govt.

Having said that, lets not do away with the complete concept of big banks. There are many who have advocated the breaking down of big banks. The most famous amongst them was Robert Fisher, President of Federeal Reserve of Dallas who said that banks should be “too small to save”.  He proposed that the existing too-big-to-fail banks should be downsized to such an extent that if and when the banks fail, it could be closed on Friday and open on Monday under a new ownership and management.  Paul Volcker, former Federal Reserve Chairman was also not in favor of these big banks and has stated that reform can be brought along only by limiting the size and the scope of the big banks. 

What one has to remember from the 2008 crisis is that it were the smaller banks which failed and led to a dominos effect; it was not the big banks – call it shadow banking or whatever, that was the main reason. And the grouse is that tax payers money was used to rescue the big banks, who had taken unnecessary risks and squandered away money, knowing that they were too-big-to-fail.  As per the list released by Financial Stability Board (mandated by G20 to oversee the regulatory response to the financial crisis), JP Morgan Chase is the biggest bank in the world, followed by HSBC, Citigroup, Barclays, BNP Paribas, Deutsche bank. There are a total of 29 banks on that list. The big question is – how can you break up such big banks, spread across the world into smaller banks? That world of small banks simply does not exist anymore with the world getting more and more connected.

But at the same time there is no doubt that too-big-to-fail banks enjoy major advantages – lower funding, higher scales of economy, lower costs than smaller banks and took risks because they knew they would be bailed out by the Govt.

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. RBI has done the right thing by cleaning it all up at one go but how to ensure that the same mistakes do not repeat?

Unfortunately, what this now means is that small and medium term borrowers will pay the price – probes, rules and regulations will go up following this and they are ones who will be subjected to them. The top companies will continue to flout and make merry.

Not big or small, we need a change in the entire value system of India is needed but that seems like an impossible task…

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