Home >Markets >Mark To Market >Big bank weddings and the risk of getting India’s economy derailed
 (Graphic: Santosh Sharma/Mint)
(Graphic: Santosh Sharma/Mint)

Big bank weddings and the risk of getting India’s economy derailed

  • Public sector bank mergers could likely derail credit flow to an already slowing economy
  • Past mergers like SBI-associates; Vijaya Bank, Dena Bank and BoB show a sharp fall in loan growth

Weddings require attention, which means the focus on everything else is minimal.

The government’s move to merge 10 public sector banks and form four big lenders risks starving the Indian economy of credit. That is because the management and the staff at these banks would be preoccupied with integration, rather than going out and lending.

“In the short run, consolidation may divert attention of PSBs (public sector banks) away from growth towards merger," analysts at Nomura Research said in a note to clients.

Recall that State Bank of India (SBI) had reported a sharp drop in loan offtake after its associate banks were merged with it in FY17. At that time, the SBI management had said that since a large part of energy was invested by its staff into the merger process, monitoring of credit and lending took a back seat.

The more recent merger of Vijaya Bank and Dena Bank into Bank of Baroda (BoB), too, hasn’t raised much hope among investors. The latter’s shares have underperformed peers in the past year, as the chart shows.

The 10 candidates for merger this time around together account for nearly a quarter of bank credit to the economy. Most of these lenders are critical sources of loans to small businesses.

While analysts point out that other lenders such as SBI and private sector banks can step in to make good the shortfall, overall systemic credit growth is unlikely to be left unscathed. Small businesses will be particularly hit.

“Synchronised, smooth mergers across multiple entities is a tall ask that can hurt credit growth, stall recoveries, gift market share to private banks in the short run," wrote analysts at BOB Capital Markets Ltd.

Already, bankers have sounded a caution on overall loan growth for FY20, with SBI’s chief indicating it won’t be more than 12-15%. As per the latest data from the Reserve Bank of India (RBI), the banking sector’s credit growth stood at 11.6% in end-August, compared to 14.2% a year ago.

An improvement in credit growth is needed now more than ever, simply because the gross domestic product (GDP) growth dropped to a six-year low of 5% in the June quarter. Nominal GDP growth was as low as 8%.

Willingness to lend is critical if RBI’s rate cuts and the surplus liquidity in the banking system are to reach the real economy. After all, the central bank and the government’s efforts in the past have been singularly to revive growth.

The government risks wiping out the salutary effects of its own policies if bank mergers clog loan flow to the economy.

It is clear that the benefits of the mergers would accrue only beyond two-three years. Meanwhile, the short-term pain should not be debilitating to lenders and the economy.

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