Old Gyan about Public Sector Banks What the new government says about PSBs is old hat. We need some action on the ground Was the issue of merging public sector banks (PSB) resurrected or buried at the prime minister’s (PM’s) Gyan Sangam with bankers in Pune this January? It is hard to say, because media reports and interpretations about what was discussed are often contradictory these days. But it doesn’t matter. Remember, a trans-harbour bridge, linking Mumbai to the vast hinterland to ensure development and dispersion of population, is not even high on the priority list, 60 years after it was first proposed in 1954. The fact that Mumbai is bursting at the seams, and its infrastructure is crumbling, has made no difference to politicians across parties that are controlled by land-sharks. In comparison, the proposal to merge and consolidate PSBs is rather young; it hasn’t even celebrated a silver anniversary since it was first proposed by the Narasmiham Committee in 1991. In the intervening decades, there have been dramatic changes in finance, banking and its regulation globally and at home. But the debate in India has remained the same—sharply polarised, inconclusive and unwilling to address the core issues of corruption, governance, accountability and political interference. Indeed, on 6th January, the finance ministry’s circular, in the wake of the Gyan Sangam, is the first official directive to PSBs and government insurers that there will be no interference in commercial decisions, transfers and posting. Narendra Modi asked bankers to act without fear of favour, but on the basis of objective, spelt-out policy. Deviation from the policy will, however, lead to action (unless the reason for the exception was clearly articulated) because ‘accountability was essential’. Importantly, the circular also called for a robust grievance redressal mechanism for borrowers, depositors as well as staff, with an opportunity for the aggrieved person to represent his case at least at two levels. We need to see whether the government plays its role by ensuring the most deserving persons are selected as managing directors (MDs) to the top four, still headless, banks. Non-executive chairmen must also be accountable for oversight over the MD’s actions and these posts must not be mere sinecures for retiring politicians, bureaucrats and politically-affiliated professionals. A clean-up of the boards of PSBs is needed by removing the many notorious chartered accountants who act as conduits for industry and as collection agents of bank chairmen. You can be sure that industry and its army of lobbyists are watching intently to see if the PM’s rhetoric at the Gyan Sangam translates into real action. The need for accountability and objective policies, with a clear articulation of exceptions, should also apply to the Reserve Bank of India (RBI) in its role as banking regulator. While RBI must be fiercely independent when it comes to monetary policy decisions, there has to be much greater accountability and transparency in its role as a banking regulator and supervisor. This is sadly missing and was evident in decisions, such as the licensing of ‘new private’ banks in the early 1990s; appointments to its board of directors (no term is prescribed for outside directors) and many investigations into regulated entities that are buried or quietly condoned. At Moneylife, we are concerned about how this affects ordinary customers. Already, the banking industry, represented by Indian Banks Association, operates like a cartel. Will it get worse after mergers and consolidation? Dr KC Chakrabarty, former deputy governor of RBI, says that the answer to ensuring better customer service is to have more banks and more competition. The argument in favour of merger and consolidation of PSBs is that India needs big banks for economy of scale and to fund large infrastructure projects. After the Gyan Sangam, we heard that the government may consider merging small PSBs with big ones. Although the decision was left to their board of directors, the government could provide a timely nudge to create big, well-run global banks. But we have heard such talk since 1991. Even the speculation about ideal mergers based on the individual culture of banks is not new. Yet, we have not even seen the merger of subsidiaries of State Bank of India (SBI) (barring two) to form a single entity, leave alone their merger with SBI to form a banking monolith. All we have seen since 1991 are a few bailout mergers forced on PSBs by RBI. These include the merger of Banaras State Bank and Memon Cooperative Bank with the Bank of Baroda; Nedungadi Bank with the Punjab National Bank; United Western Bank with IDBI Bank and Global trust Bank (GTB) with the Oriental Bank of Commerce. Look at what happened to the private banks licensed in the early 1990s; many of them with extremely strange antecedents. Times Bank was the first to merge with HDFC Bank. Centurion Bank and Bank of Punjab—two other strange licences, first merged with each other and were, later, acquired by HDFC Bank. These do not including the shady CRB group (which had a provisional banking licence), which collapsed in the mid-1990s, and GTB which was bailed out post-2000. That apart, ICICI Bank took over Bank of Madura and Bank of Rajasthan, and Kotak Bank recently acquired ING Vysya. In effect, only a handful of new banks were licensed over the past 25 years but an equal number (from the old and new crop) have vanished. The merger and consolidation of large PSBs, if it ever happens, will further reduce the number of banks in the country and kill competition. This is bad for the consumer, because banks will operate even more like a cartel in that situation. We also need to mobilise public opinion on the circumstances in which having big banks, capable of funding large infrastructure projects, is in India’s interest. The big learning from the global financial crisis is that ‘banks that are too big to fail’ are bailed out by the exchequer and the entire country pays the price. However, profits and bonuses are cornered by top management. While India claims to have escaped the global financial crisis, PSBs are in a mess today because they were big lenders to many mega-scamsters of the UPA regime and shaky infrastructure projects (telecom, coal, power, realty and SEZ). PSBs were also under pressure to bail out all the realty companies that drove up property prices in our cities and have kept them high for the past five years despite pitiful sales. Do we really want bigger banks to do more of this? It is also important to remember that, despite nationalisation, 600 million Indians remain un-banked and even the large numbers touted by the PM’s Jan-Dhan Yojana is just a drop in that ocean. There is no evidence that large, merged PSBs will reach out to a larger swathe of Indians, beyond the tokenism of opening no-frills accounts to please the government in power. Over 40 years of corruption and influence-peddling through PSBs is not going to vanish overnight, just because Mr Modi has demanded accountability in return for operational freedom. Also, let’s not forget, that the PM has not promised full freedom or autonomy to PSBs. He has said that there will be “no political interference, but there could be political interventions for implementing programmes for rural housing and financial inclusion.” Better managed PSB, more accountable CEOs, a board of directors that has no touts for politicians and industry, will ensure a substantial transformation, even without rushing to cut government holding or to merge banks. The issue of capital infusion to meet capital adequacy norms remains; but well-managed PSBs will give government a significantly higher valuation when it wants to dilute its holding. But Mr Modi first needs to demonstrate that he means to walk the talk on bank accountability.
Posted on: Sat, 24 Jan 2015 02:00:33 +0000