The Big Fat PSU Bank Mergers

A mammoth task -The four shotgun weddings performed by the Centre may create colossal banks. But given their huge losses and fragile balance-sheets, the road ahead could be rocky.

- RADHIKA MERWIN

There are some ideas that start out brilliant, fade away when not acted upon, then make a comeback when all else fails and are finally done to death with poor execution. The merging of public sector banks is one such idea. It was the Narasimham Committee that mooted the merger of public sector banks way back in 1991. The Centre’s recent big bank merger announcement — after the merger of SBI with its five associate banks two years ago, and Bank of Baroda with Dena Bank and Vijaya Bank last year — has finally made this a reality. But sadly, the good news ends here.

The Narasimham Committee had stated that mergers should emanate from bank boards, with the government as the common shareholder, playing a supportive role. Also, it had insisted that mergers should not be seen as a means of bailing out ‘weak banks’ but rather be between strong banks. Above all, such mergers can succeed only if they lead to rationalisation of workforce and branch network.

The mergers announced by the Centre — folding ten PSBs into four — meet none of these yardsticks.

After a tumultuous four to five years, nearly all PSBs are saddled with humongous losses, weak capital and fragile balance-sheets. Being the largest shareholder, the Centre has been throwing good taxpayers’ money into these banks every year, to bail out some of them.

But with the government running out of cash and ideas (such as recapitalisation bonds that involved ingenious financial engineering, wherein the Centre simply borrows from the banks to meet their capital requirements), it seems to have dug out the long-buried notion of bank consolidation to rescue the ailing PSBs.