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Voices of the banking sector

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Bank consolidation may be the flavour of the season but we must not give in to the temptation as risks associated with mergers are too high. Focus must be on overcoming the underlying challenges

India’s banking sector has experienced the worst phase in recent times and various initiatives undertaken to encounter the problem of Non-Performing Assets, NPAs (which rose to 9.6 per cent of total bank loans), such as Indradhanush 2.0, did not yield positive results. This led to slowdown in the banks’ lending activities, thereby adversely impacting industrial and retail growth.

The Government last month announced a recapitalization scheme, under which it is planning to infuse Rs 2.11 lakh crore in the next two years to Public Sector Banks (PSBs) which are facing low capital adequacy ratio. This will put a check on the problem of loss occurring due to writing off the NPAs, and thereby increase the financial strength of the banks and make their balance sheet stronger.

Thus, this effort will provide a conducive environment for both credit growth as well as economic growth. However, these positive impacts will become a reality only when the scheme is implemented efficiently.

Measures should be taken thereafter to address the problems which actually landed the banking sector at this state of affairs. They must avoid giving loans to willful defaulters and, most importantly, alteration in lending policies are required, among many other precautionary actions.

The second major initiative that the Government is planning is the consolidation of the banks with the objective of fewer but healthier banks. This has been highly debated as merger of the  banks means an increase in NPAs. There is also a positive side that risk

absorption capacity of the banks (after merger) will improve with an increase in the size of the bank.

From the past experience in India, mergers have never proved to be the solution to the problems faced by the banking sector. Recently, the State Bank of India and the State Association Bank merged — they belonged to the same group yet, it has not been easy as discontent brewed up and agitation are now being run in the court.

Mergers should always be market-driven, otherwise benefits from the synergy are tough to be realized. This problem was experienced with the merger of the Punjab National Bank and the New Bank of India that happened in the 1990s. No possible benefit could be seen from the merger. The same was experienced during the merger of the Global Trust Bank and the Oriental Bank of Commerce in 2000s.

It is well-known that by nature, PSBs are risk averse and they are not fully equipped to take commercial decisions. Besides, they suffer from inefficient management. These issues should be dealt with utmost sincerity to boost the banking sector and, thus, help improve the overall economic situation of the country.

For any merger to take place, there has to be efficient coordination, training requirement, data consolidation and relooking of policies which are different for different banks. This seems to be a far-reaching goal in a country where even coordination among the branches of the same banks does not exist.

Moreover, shut down of loss-making branches will lead to an increase in unemployment and further squeeze employment opportunities in the banking sector. Hence, consolidation of heterogeneous banks should not be rushed through as the Indian banking sector is not in a position to take risk or experiment.

(The writer is Assistant Professor, Delhi University, and a PhD scholar of Economics)




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