Repairing banks

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Repairing banks

Thursday, 20 September 2018 | Pioneer

The Government’s decision to merge banks is laudable but more needs to be done to completely repair India’s banks

The proposed three-way merger between Vijaya Bank, Dena Bank and Bank of Baroda may not be great news for shareholders but is a continuation of this Government's policy to repair the public banking sector. The fact is that India's public sector banks are still suffering from the lending splurge they indulged in almost a decade ago — a splurge which saw many of the loans, particularly to the physical infrastructure and power sector, go sour, not least due to their gold-plated nature and the political influence exerted. The logic used by the Finance Ministry to merge a very healthy Vijaya Bank and the large Bank of Baroda, which is recovering, with Dena Bank, which is one of the more troubled public sector lenders, has not gone down well with shareholders of the first two banks. However, the need to reduce the number of public sector banks is important. Most public sector banks partook in a ‘me-too’ thinking in disbursing loans, and the competitive rush to build up their loan book is the reason why many of them are in trouble. It is also important that this new merged entity looks beyond retail and corporate lending and leverage their immense network. While the Government has assured no employees will lose their jobs, eventual employee and branch rationalisation will be important in order to cut costs. While more could have been done to repair India's banks, this Government has done a relatively good job. It must be commended, although the ultimate aim to cut the number of Government-owned lenders to just six remains a pipe dream and some lenders, like United Bank of India, remain in trouble.

On other economic fronts, while the economy continues to grow, the falling value of the Indian rupee and rising oil prices at the pump remain huge concerns. The fact is that Prime Minister Narendra Modi continues to have immense goodwill among the public which is why there have not been continuing protests about rising fuel costs. Can and should the Government do more about this? Yes, they should but with social sector spending vital in the months ahead of an election and Modi and his Cabinet unwilling to leave the costs for the next Government, no matter who comes to power, it is unlikely to do much for now. Something that will not make motorists happy. And as for the rupee, it seems closer to having found its ‘real’ rate for the time being, although it has made a mockery of Modi's promise of a stronger rupee before he came to power. India's stock markets have been reacting nervously to all this but consumer demand continues strongly. However, jobs market remains weak as the rush for low-level government jobs shows. This continues to be Modi's biggest challenge ahead of the elections next year but repairing those problems will take a lot longer than repairing the banks. And with the Opposition unable or unwilling to provide answers as to how they will employ millions short of giving handouts, it is a question to which there seem to be no answers.

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