Finance minister Arun Jaitley has mooted the need for consolidation of public sector banks though he did not say what he feels is the ideal number of banks that there should be. An expert group would be set up immediately to look into the pros and cons of this issue and it would also consider giving stock options to employees. There is nothing new in the idea he has mooted as his predecessor P. Chidambaram had suggested that the good banks be merged so that they could be considered global banks and finance infrastructure projects.
He had said it was voluntary — he would do the match-making and they could take it forward. He had decided on Union Bank and Bank of India, who were among the top five banks and were strong. However, nothing happened as the bank chairmen, among other things, were unwilling to give up their hallowed positions. The banking unions, which are strong, had opposed it as they said workers would be thrown out.
Today things are different. Banks across the board have NPAs ranging from 8-10 per cent and their rates of recoveries are dismal. According to Mr Jaitley, banks are in favour of mergers perhaps because they have reached the end of the road and don’t know how to tackle huge NPAs. It would be interesting to see what rabbit this proposed expert committee will pull out of their hat. One cannot imagine what good would come from two banks with poor balance sheets merging. How will it work with the huge burdens of two banks?
The RBI-appointed P.J. Nayak committee had suggested that banks be brought under the Indian Companies Act, with the government holding 26 per cent of their equity, and the present Banking Act be scrapped. He had been successful with this idea in the case of Axis Bank, which was formerly UTI Bank and he was the bank’s chairman. There was also a suggestion in the last 10 years that public sector banks could merge with private sector banks; this suggestion, of course, was when the banks were all strong. The whole idea of having banks merge is to have big banks, which is also a dubious idea.
There are numerous examples abroad where giant banks in the US, like Citi Bank and others, had collapsed in the 2008 banking crisis and had to be bailed out by the government using public funds. Besides, a country as large and with as widespread a population as India’s, needs smaller banks that can reach out to people in every nook and corner. There is no doubt that the banking system is in a mess and, as minister of state for finance Jayant Sinha has said, defaulters alone owe the banks close to $11,000 crore. It will be interesting to see what the expert committee suggests.
