Memo to Modi ahead of bank meeting: Sell off weak state-run banks, not merge them-FirstPost As Firstpost has noted before, the government being in the business of banking serves no purpose and often leads to lack of autonomy in the functioning of state-run banks and their misuse to roll out the government’s populist agenda. This situation can be changed only if these banks are relieved of the curse of micromanagement by politicians, which was most visible during the 10-year UPA rule and something that the current NDA government tend to follow. One critical aspect Modi is likely to discuss with bankers is the consolidation path for state-run banks. According to reports, the government might consider merging weaker state-run banks, which have high level of bad loans, with strong, large banks in order to execute a rescue mission. Among the probable candidates for the merger could be Andhra Bank and United Bank of India, which have been facing severe stress on their balance sheets on account of high level of stressed assets. The government should refrain from merging a weak government bank with a strong well-run bank as it can put even the acquirer bank in trouble. Merger of a weak public sector bank, neck-deep in bad loans, with a strong bank as a panacea to salvage the former, can lead to an eventual disaster. That is because the reasons for stress on the balance sheets of the target bank, like in the cases of Andhra Bank (high NPAs from agriculture loans) or United Bank (bad loans from mid-sized and large companies) are unlikely to get resolved through a merger with another government bank like Bank of Baroda or Punjab National Bank, which already have their own share of troubles to handle. The better solution will be to sell off weak state-run banks to private banks, which have deep-pockets and expertise to repair the stressed assets and get these entities back on track. This is something, for which RBI governor, Raghuram Rajan, publicly made a strong case some five months back. Rajan’s points were these: For one, merging two unhealthy banks in the financial system will create an unhealthy entity that would lead to creation of a bigger problem in the economy. Secondly, even in the case of the merger of an unhealthy bank with a large healthy bank, the merger would bring problems to the acquiring bank. Thirdly, in the event of a merger of a weak bank with a strong bank, the acquirer will have to deal with the cultural problems that arise out of the merger, besides dealing with the primary challenge — the bad loan pile in the weak bank — creating difficulties for the strong bank. By any yardsticks, it will be ideal for the government to pay attention to the former International Monetary Fund economist-turned-central banker and not hurry with the merger of United Bank or any other weaker state-run bank for a few reasons: For one, the bad loan problem in a particular bank is created over years, not overnight. Hence the solution cannot come overnight. Apart from the general economic slowdown common to all banks, the reasons for sticky assets in a bank can vary from careless lending to weak risk management tools to interested-party lending at the behest of powerful industrialists or politicians. In other words, there is a past attached to the stressed assets in the books of every bank and mostly reasons for the bad loan rise vary with banks. In the event of a merger, dealing with this bad loan pile may not be easier for a currently healthy bank that is forced to acquire the weak bank. Besides causing a sudden rise in its bad loans and resultant provision levels, the new chunk of bad assets can become a drag on the books of the host bank for next several years, causing an imbalance in the book of acquiring bank. This can possibly have a contagious effect on its overall book. Secondly, no bank merger happens smoothly. Any merger comes with its own set of issues at the time of integration. These issues range from the culture of the merging banks, their business systems in place and own core areas of expertise and geographies. This is especially true in the case of public sector banks, which are heavily unionised, where the integration process can be a lot tougher, unlike in the case of State Bank of India and its subsidiaries, where work culture and systems in place are the same. Thirdly, through the merger of two banks, the government will be only transferring the problem from one entity to another. The steps the government can take to cure the bad loan problem in a particular bank, such as installing better risk management tools, bringing in expert agencies or putting in place better management, can be done even without a merger. In fact, that can yield faster results since the problem is isolated and easy to identify. In the event of a forced, bad-loan-driven merger, should the acquiring bank focus on the integration challenges or containing the bad loan issue? The answer to this question is difficult for any expert banker, since both issues demand immediate attention. Repairing bad loans is a difficult affair and requires day-to-day monitoring. The handling turns even difficult if bad loans are imported from another bank. It is better to treat stress associated with each banks separately. As Rajan highlighted, consolidation can happen in the cases of stronger banks, where there will not be any problems to fix other than the merger itself. Perhaps, Modi should take a lesson or two from Rajan before hurrying with the bank merger, if that indeed is a proposal. firstpost/business/memo-to-modi-ahead-of-bank-meeting-sell-off-weak-state-run-banks-not-merge-them-2026599.html
Posted on: Sat, 03 Jan 2015 14:02:03 +0000
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