The Indian government’s sudden and far-reaching decision to merge three state-owned banks without consulting the stakeholders has sent shockwaves in the crisis-ridden banking sector, triggering fears of loss of jobs and brand identity.
Though the federal finance minister is betting his bottom dollar that the amalgamation of two healthier banks – Bank of Baroda (BoB) and Vijaya Bank – with moth-eaten Dena Bank will perk up lending and economic growth, many feel that Arun Jaitley is only chasing an illusive mirage what with the banking industry languishing in the Queer Street during the four years of the Narendra Modi administration.
The merged entity to be operational within six months will be the second largest public-sector bank (PSB) with 9,489 branches and a combined business of Rs 14.82 trillion ($204 billion). This is in line with the government’s declared aim of having fewer but larger banks, but experts hold out a warning that consolidation for the sake of size without cleaning up the balance sheets will be like sweeping the muck under the carpet.
With the government owning majority stakes in the three banks, the powerless boards of directors of these lenders on September 29 silently signed on the dotted line to give their go-ahead to the finance ministry’s merger proposal about which, strangely, top managements, investors, depositors and employees were kept in the dark.
No wonder, even as investors remained confused about the merger to bail out the goner Dena Bank saddled with highest – 22 percent of its advances – non-performing assets (NPAs), the shares of BoB and Vijaya Bank crashed on the Bombay Stock Exchange soon after Jaitley revealed the game plan at a hurriedly-called press conference last fortnight.
Obviously, staff of the two strong banks might not be too happy with the fourth major restructuring in the financial sector, which is sure to throw cold water on their enthusiasm resulting in poor quality of service to customers who, in a cascading effect, could then shift their loyalty to private banks.
After all, no miracles happened after the similar merger of the State Bank of India (SBI) last year with its five associate banks and Bharat Mahila Bank. Indeed, the amalgamation led to closure of branches, increase in bad loans, reduction of staff, and reduction in business.
Says C.H. Venkatachalam, general secretary of the All India Bank Employees’ Association: “For the first time, the SBI went into loss. Its bad loans increased from Rs 112 trillion to Rs 225 trillion after the merger. It is high time the government took tough measures to recover these bad loans from defaulters.”
At least four middle-level executives of the banks involved in the three-way merger told this correspondent under their breath that they could be given the boot like their numberless friends in the SBI when the country’s largest bank swallowed six smaller lenders.
Jaitley, of course, has promised that the amalgamation will not cause retrenchment and no one will be given the golden handshake. However, the employees’ nightmares were inevitable considering the fact that BoB has 5,502 branches in Gujarat and Maharashtra and Dena Bank some 2,000 branches in the same geographies.
The rationalization of branches could result in many staffers being thrown out of their jobs. “There will certainly be merger of contiguous branches in the twin states and this can affect the customers of the branches that stand to lose their identity. There will obviously be staff surplus requiring relocation or enforced retirement,” pointed out a worried executive already feeling the pinch.
Government officials have, however, been straining their every nerve to allay the fears, claiming that with a significant boost in financial strength, net NPA ratio, provision coverage ratio and capital adequacy ratio, the stronger amalgamated bank will be better positioned to tap capital markets.
According to Mumbai-based top-drawer business consultant Dhimant Bhatt, the first three-way merger is a test case for consolidation of PSBs in the next phase of financial reforms, and will improve efficiency of such banks, putting them at par with well-oiled private banks like HDFC and ICICI Bank.
“The NPA monster keeps raising its head to push the banking system into deeper and deeper crisis. Under the circumstances, the merger proposal is a right move in the right direction to improve the overall financial performance,” opined Bhatt.
Jitendra Prajapati, an accountant working in a prestigious company in Ahmedabad in Prime Minister Modi’s home state of Gujarat, told Al Arabiya English that the resultant synergy will reduce banks’ operating costs and increase their efficiency, and they can pass on these benefits to their loyal customers in the form of lower lending rates and interest margin.
Banker Dilip Mundhva also felt that merger of banks was the need of the hour in the current banking scenario, saying fewer heads would enable the government to supervise and control the lenders effectively but added that the new entity would prove to be a fool’s gold if the ambitious plan is not executed properly with bad loans of the banking industry standing at a staggering Rs 895,600 crore.
All told, the government infused Rs 1,18,724 crore (Rs 1187.24 billion) in PSBs between 2008-09 and 2016-17, and the second wave of recapitalization of Rs 2.11 trillion was announced on October 24, 2017.
Without capital injection, the Modi regime’s vision of the merged entity turning into a global bank with customers laughing all the way to it will only remain a vain chimerical mirage.