Chasing rainbows PDF Print E-mail
Tuesday, 06 June 2017 00:32
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Shobhana's edit

Like Indradhanush, bank consolidation may yield little


The Indradhanush scheme announced in mid-August 2015 was supposed to reform state-owned banks. But it was RBI review of asset quality six months later that was really the beginning of the reform process. Now, finance minister Arun Jaitley says the government is mulling consolidation of state-owned banks. The government’s concern is that if they are left on their own, some of the weaker banks could sink. That is probably true. The RBI’s asset quality review revealed most PSU lenders were financially fragile and others poorly capitalised. The combined profits for 21 PSU banks (excluding SBI associates), in 2016-17, were just Rs 473.71 crore; in 2015-16, they ran up losses of Rs 19,634.09 crore. But merely merging banks cannot be the solution and could, in fact, hurt the more viable bank. For instance, while SBI on its own reported a profit of Rs 10,484 crore for 2016-17, the profits crashed to Rs 241 crore when those of its subsidiaries were taken into account. If indeed the government wants state-owned banks to do well, the strategy has to be one where a merger is accompanied by both a big infusion of capital and a simultaneous pruning of the workforce.

As per the Indradhanush plan, the government is committed to infusing Rs 70,000 crore of capital over four years, but a realistic estimate of stressed assets would show this is grossly inadequate. Thanks to rising stressed assets, the capital is eaten up even before it has been given. Which is why the government must be willing to dilute its holdings, preferably to 33%. The bigger challenge, however, will be to prune the workforce. Increasing digitisation calls for big spends on technology and cyber-security, and banks must shed flab and close down all unviable branches to rein in costs. Else, the core businesses will be in jeopardy.

With the Parliamentary elections just two years away though, it would take a brave government to talk retrenchment. What needs to be spelt out to the unions is that the alternative to some people being laid off could be worse, that many banks could be wound down. Unfortunately, though, the unions may not see it that way. One could argue a merger would reduce competition, but if the headcount doesn’t come down meaningfully, the new entity would find it hard to be competitive. The finance minister has talked of how the ‘business’ of IDBI Bank, for example, could be sold with the government retaining the immovable property. The fact is that no prospective buyer would be willing to buy the business—riddled with bad loans as it is—if employees cannot be laid off. Unless it is willing to talk tough with the unions, the government will be merely chasing rainbows.


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