But mergers will cut costs, so tackling unions critical
The finance minister is doing nothing more than stating the obvious when he says the country needs strong banks rather than a large number of lenders. Moreover, given almost every state-owned lender is in a bad shape, what is also obvious is that the merger of two bad banks cannot result in a good one. Nevertheless, an expert committee to look into the merits of merging banks, a move that has been debated several times over the past decade, can’t hurt. It is possible a careful consideration of the situation might throw up some new ideas. The big difference today is that the balance sheets of banks are in poor condition and even truckloads of capital might not be enough to get them back on track. The government’s estimate that banks need R1.8 lakh crore of capital by FY19 doesn’t sound right to analysts who believe the number could be closer to R2.5-3 lakh crore. Whether or not the government, which is clearly short on resources, should continue to capitalise them with taxpayers’ money is debatable. As it is, coming up with the promised R25,000 crore for FY16 has been difficult. And, unless they are willing to sell their shares for a song, raising capital from the stock market is out of the question.
Therefore, the government must impress upon the unions—who will move heaven and earth to prevent merger—that some consolidation is necessary, if nothing else to bring down costs. It must convince them that in the absence of tough measures several banks could end up becoming insolvent, resulting in a large number of people losing their jobs. Talking to unions, who can be a selfish and self-serving lot, is never easy. But, if the government is serious about resurrecting banks and making them operationally efficient—even if they are not merged—costs need to be brought down. Increasingly, technology is driving transactions and, therefore, IT platforms need to be beefed up and branches downsized. Else, private sector banks which are ahead in the race to make transacting more customer-friendly with the use of net banking and apps will leave state-owned lenders far behind. Unfortunately, costs have not been in focus at either of the two Gyan Sangam banking conclaves. But a comparison of the cost-to-income ratios for state-owned banks and private sector lenders makes it apparent the former need to shed some flab; in FY14, for instance, Bank of Baroda’s cost-to-income ratio was 82% while for Kotak Mahindra Bank, it was 74.4%. The government must convince the unions that revamping state-owned lenders completely and making them leaner is necessary to help them compete with their private sector peers. Else, they will slowly lose market-share, making them altogether unviable. The private sector already has close to a fourth of the loan market and close to 40% of the fee market—in FY05, these figures were, respectively, just 16% and 25%. A merger will not solve all problems, but it can help lower costs and allow the management focus on technology-driven transactions.