Big Bank as a Bad Idea

Ms. Nirmala Sitharaman, FM has broached the idea of creating big banks to meet the challenges of a surging Indian economy, outpacing China in terms of growth rate and in the cusp of creating a $5T economy Her idea is in line with recommendations made by the Narasimham Committee in 1991 & 1998, which had suggested merger of large Indian banks to make them strong enough for supporting international trade and bolstering international trade. It took note of India’s economic reform initiative of liberalization, Privatization and Globalization (LPG) in 1991 and rightly surmised that economic reforms cannot reach their logical culmination till reforms in banking and financial sector were also carried out. Some of the significant recommendation were reducing preemption of public funds through SLR and CRR drastically, deregulation of interest rate determination and complying with BASEL 1 stipulation of keeping 8% minimum capital which are risk weighted. The triple mantra of BASEL was capital adequacy, supervisory review and market discipline. Thanks to the Narsimhan Committee, the SLR has come down from 38.5% in 1991 to 18% now & CRR from 15% to 4.5 % and 87.5% banks’ deposit are available for lending to investors as against 46.5% earlier.

It would be useful to study how SBI’s merger with five associate banks. Firstly, the asset quality has not improved. Net NPA as a ratio of net advance has increased from 2.83 (pre-merger) to 3.66. Similarly, return on Asset has come down from 0.41 to .02 and Return on Equity from 6.3% to 0.48%. The only redeeming feature has been that the Cash Adequacy ratio remains robust at 10.65% after merger from its earlier level of 10.31% in 2017. It would therefore be clear that there is significant deterioration in performance of SBI post-merger. Hence, any further foray in to amalgamation in to big banks must make a careful appraisal as to why SBI with 23% of market share, 25% of loans & deposits has performed poorly in terms of asset quality, management efficiency etc after merger.

It may be recalled that in the Budget speech 2021-22 the FM has announced a decision to privatize two PSBs in a year’s time. The indications were that Central Bank & IOB are the potential converts. Niti Ayog has also proposed BOI for privatization. The Finance Secretary while speaking in India Policy Forum recently has suggested that the government will eventually privatize most PSBs and go beyond the suggestion of PJ Nayak Committee (2014). This Committee has made far reaching recommendations like repeal of Bank Nationalization Act of 1970 and 1980, as the financial position is fragile, masked by regulatory forbearance and rising stressed assets. The Committee observed that re-capitalization of PSBs is extremely costly and recommended privatization including merger or designing a new governance structure. They also suggested to upgrade the quality of board deliberation and highlighted the importance of business strategy, financial reports, risk, compliance and consumer protection as the sine qua non of a sound banking system.

Mr. Ruchir Sharma, a Global Investment Analyst in his book ‘Rise and Fall of Nation’ brings out how most of the emerging market economies are relying more on private banks and efficiency of equity returns rather than populist interventions like priority sector lending which has given rise to very level of non-performing assets. Mr. Ruchir Sharma makes a strong case for decluttering the public banking sector from the dual control of Ministry of Finance and Reserve Bank of India. Mr. N.S.Viswanathan, formerly Dy. Governor of RBI also believes that the high level of NPAs in public sector banks is largely due to lending to entities which have good political connection and lax due diligence before sanctioning loans. Banks have written off Rs 14.56 lakh crores in the last nine financial years. The NPA for private sector banks are significantly low. For instance, in case of HDFC it is only 1.36% as against 9% for State Bank of India. The return on equity for most private sector banks is around 11.4% as

against .48% for SBI. Similarly, return on asset for most of the PSB is around 3.3% as against 0.4% by SBI.

The Parliamentary Standing Committee on finance has suggested that NPA need to be segregated for resolution and the balance sheet of PSB need to be sanitized. The Finance Minister has accordingly suggested constitution of a national asset resolution company to which Rs. 2 lakh crores stress assets are to transferred to it. However, it is not clear how many cents to the dollar will accrue to the Government out of the stress assets. In a recent case, involving Video conference, which was subject to IBC process. Only 5% recovery is expected.

It would be clear that neither constitution of Big Banks through merger as suggested by the Finance Minister or piecemeal privatization of PSBs are not the way forward for proper financial intermediation of India’s economy. For India to be part of flourishing global economy an investment of around $300 billion per year would be required. The Government has been promoting the idea of PPP with a fund sharing of 50:50. However, the past experience has revealed that after the initial success in the high way sector most of the PPPs run into financial difficulties. In fact, 80% of the NPAs are in the infrastructure sector. The Kelkar Committee had suggested a slew of measures to make the PPP experiment and its funding viable by suggesting appropriate change and flexibility in the contractual terms. Sadly, the Government is yet to act upon it. Banking being the lubricant for a vibrant economy must be independent of political influence, be professionally administered and made accountable. The time for privatization of PSBs rather than bundling them as Big Banks has come .

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