Home / Opinion / Views /  Opinion | A big bank theory that won’t suffice

A peculiar affliction that has dogged the Indian corporate sector for many years is now affecting even the government. India Inc. suffers from the MAFA condition: mistaking action (or activity) for achievement, or verbiage as a substitute for vocation. The current government’s response to the economic slowdown has been sporadic and short on strategy. Yet, electoral cycle compulsions force it to keep announcing and attempting various actions that are unlikely to yield the desired results, either in the short or even the medium term. On Friday, India’s gross domestic product growth slumped for the fifth straight quarter to 5%, a six-year low. Faced with job losses and the absence of fresh employment opportunities, a farm crisis, a severe investment drought, and the financial sector’s myriad malaises, resulting in sluggish aggregate demand and slowing growth, the government has come up with only patchy solutions. A good example is Friday’s announcement of four mergers among public sector banks (PSBs). The grand plan involving 10 banks and reducing the total number of state-owned banks to 12 was perhaps required. What’s odd is the chosen timing and the $64-billion question: how will it help reverse the slowdown? At a time when lenders have become lending-averse and individual bankers wary of witch-hunts over commercial judgement calls, mergers of this scale are likely to focus institutional and professional energies on executing these unifications successfully, which could detract attention from the critical task at hand of identifying unmet credit needs and keeping India’s loan pipelines humming. Also, in terms of the other governance reforms announced for PSBs, the government has shied away from biting the bullet by distancing itself from the appointment of chairpersons and managing directors, the root cause of the mess at many banks.

It is difficult to ignore the politics in the choice of banks for the exercise. Of the three PSBs based in Kolkata, two—Allahabad Bank and United Bank of India—will lose their identities and be subsumed into other larger banks, leaving the city as the home base of only one PSB (UCO Bank) and private lender (Bandhan Bank). It can be argued that all the three PSBs needed government capital and intensive nursing. The same, though, can also be said of Bank of Maharashtra, or Bank of India, both of which emerged from the central bank’s prompt corrective action framework only early this year but have managed to escape the merger dragnet, perhaps on account of the imminent assembly elections in Maharashtra this year. These reservations over the Centre’s plan persist because it has not provided a rationale, or eligibility criteria, for its selection of PSBs.

At a strategic level, the merger will partially ease pressure on government finances from the over-sized bank recapitalization bill, but is unlikely to set credit supply rolling. The government’s finances are being pulled in different directions by diverse expenditure demands, which include large sums having to be set aside for a variety of objectives that may or may not enhance growth. In the face of escalating demands to replenish depleted bank balance sheets with fresh capital to restart the credit engine and investment activity, the government allocated a mere 70,000 crore in this year’s budget and then resorted to these amalgamations. The worry is, even if they’re unavoidable, they are unlikely to generate any immediate benefits for the economy in the absence of appropriate government spending.

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