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LATEST NEWS UPDATES | Why India's mega bank mergers move may not yield the desired results -Mythili Bhusnurmath

Why India's mega bank mergers move may not yield the desired results -Mythili Bhusnurmath

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published Published on Sep 4, 2019   modified Modified on Sep 4, 2019
-The Economic Times

Government’s forced mega merger of public sector banks could scupper economic recovery.

I am not saying we maintain a Panglossian countenance, that we smile away every difficulty. But, in any real economy, the mood is very important,’ observed Reserve Bank of India governor Shaktikanta Das, speaking at an event in Mumbai late August. Sound advice. Sentiment matters. Irrational despondency can be as damaging for the economy as ‘irrational exuberance’.

But even the best Pollyannas will find it difficult to smile in the face of fresh evidence from the Central Statistics Office (CSO) that the economy is in deeper trouble than GoI has cared (dared?) to admit so far — GDP grew by just 5%, a 25-quarter low, during Q1 2019-20. The last time growth slipped to a comparable low was in Q1 2013, when the UPA government under Manmohan Singh was battling charges of ‘policy paralysis’ following the Comptroller and Auditor General (CAG) report on the coal block scam. Afar from flattering comparison.

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But whether by design or fortuitously, GoI was saved the blushes. Thanks to finance minister Nirmala Sitharaman’s announcement of a mega merger of public sector banks (PSBs), media attention was diverted from dismal growth numbers to bank mergers. Despite the fact that the proposal may have had merit when it was mooted by the Narasimham Committee 27 years ago, it is no longer regarded as the final word on the ideal size of banks. Indeed, one of the biggest learnings from the 2007-08 global financial crisis is that large banks could pose systemic risks that endanger the entire economy. On the contrary, small is beautiful.

That may not gel with the image of a muscular government. But whatever the reason, after the shotgun weddings brokered by the finance ministry, the number of PSBs will shrink dramatically: from 18 as on date (27 in 2017) to around dozen. But as with all mergers, especially those that are board-driven only in name, the cost-benefit trade-offs are far from obvious. The benefits are highly questionable. But the pain and cost are real, and are likely to prove enduring. Ask any Punjab National Bank (PNB) official who lived through the trauma of its merger with New Bank of India back in 1993. Despite the ‘common’ culture of the two Delhi-based banks, it took years for PNB to recover from the ill-effects of being a reluctant suitor.

Even if one is willing, for the sake of argument, to give the benefit of the doubt to the business rationale of the mergers, there’s no getting away from the nagging sense that the timing is most unfortunate. At a time when PSBs across the board should be focusing on revival of bank lending and recovery of bad loans — remember the Insolvency and Bankruptcy Code (IBC) process is yet to stabilise — PSB managements accounting for close to 82% of PSB business and 56% of all bank business will, instead, be engaged in trying to see mergers through.

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The Economic Times, 2 September, 2019, https://economictimes.indiatimes.com/industry/banking/finance/banking/view-why-indias-mega-bank-mergers-move-could-backfire/articleshow/70939201.cms


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