Big bank theory

The track record of this government has given us enough reason to be sceptical about another experiment with merging PSBs

Financial markets often use a term “big-bang reforms”, something that they want the Indian government to unleash. There is no clear definition of this term but we can draw upon Potter Stewart’s (Associate Justice of the US Supreme Court) test of obscenity: “I know it when I see it.” Last Friday, Finance Minister Nirmala Sitharaman announced another round of mergers of select public sector banks (PSBs). Many people feel this is what big-bang reforms look like, wistfully recalling the heady days of 1991. Does it? The test for big-bang reforms is two-fold: Something that is immediately and very positively impactful and irreversible.

In 1991, within a few months of coming to power, P V Narasimha Rao abolished a silly law called the Monopolies and Restrictive Trade Practices Act, which only put hurdles on production - when India was perpetually short of everything. That was “big-bang reform” because it freed the genie of entrepreneurship that was bottled up for decades. I am sure there will be some benefits in these mergers too, but merging a bunch of weak PSBs to make them bigger fails the test of big-bang reforms. M G Bhide, a thoughtful, retired chairman of Bank of India, says banks will save on cost and have money to invest in technology. Also, with fewer banks, the scope for the number of political appointees reduces. Another ex-chairman of a PSB is 

less charitable. “If you combine a small mess, you will only get a bigger mess,” says he.

Poor track record

We will have to wait and see what happens. What is inescapable, though, is the track record of this government; it has given us enough reason to be sceptical about another experiment with merging PSBs. The government has been struggling to fix PSBs for over four years through incremental reforms. There is minimal progress and plenty of evidence that politicians don't get it — they are living in a world of their own.

Gyan Sangam: In January 2015, Prime Minister Narendra Modi went into a huddle with PSB chiefs to draw up an action plan for banking reforms — a two-day, top-level retreat, branded Gyan Sangam and attended by the finance minister, RBI governor, minister of state for finance Jayant Sinha, and secretaries in the finance ministry. The prime minister wanted to “achieve a broad consensus on what has gone wrong and what should be done both by banks as well as by the government to improve and consolidate the position of PSBs”. He was supposed to get “the outline of a reform action plan … and further deliberations will take place in his presence”, said an official release. I wrote here in December 2014, just before the retreat, that PSBs needed massive equity capital of Rs 2.4 trillion by 2018 to meet the Basel III norms. If tough questions are not asked, the Gyan Sangam will tinker at the edges and preserve the status quo of PSBs. Nothing happened. A Gyan Sangam was held the next year too and then forgotten. Five years later PSBs are in worse shape. 

Indradhanush: This seven-point scheme was announced in August 2015. It promised better senior-level appointments, setting up a Banks Board Bureau (BBB), pumping in more capital, reducing bad loans, empowering bank management, improving accountability, and better governance. It was another flop show. The first three were easy to do. A BBB was set up, but largely ignored, even after a revamp. The re-capitalisation of banks was announced in late 2018 and is happening in driblets.

The politics of it

Is reforming PSBs an economic objective at all? I have maintained that we know little about this government's goals and road map. We have to read between the lines and watch its actions. At the Gyan Sangam, Mr Modi asked banks to move to the second phase of the Jan Dhan — promote financial literacy by encouraging competitions in schools, much like mock Parliaments. He also instructed them to develop common strengths in software and advertising, help develop 20,000 to 25,000 Swachhta entrepreneurs per bank, offer loans to students (despite huge bad loans on this account) and avoid “lazy banking”. Mr Modi also told the bankers that, as part of corporate social responsibility, they should take up one sector each year to play a positive role. A rather underwhelming agenda, when PSBs were facing a gigantic crisis. 

Oh, and Jayant Sinha, minister of state for finance, had asserted in early 2015 “If we dilute stake in PSU banks now, then we will be diluting at distressed valuation. We need to increase price-to-book multiples of PSBs ... and bring them at par with private sector banks ... It is our responsibility to ensure that if we’re going to dilute our stake, which is the stake of the people of India, we’ll do it at an appropriate valuation”. Valuations have collapsed since then as frauds and writeoffs have ballooned. As I said, politicians live in their own world.

The late Arun Jaitley, who was finance minister, had asked “why this obsession with big-bang reforms? We can achieve a lot of things through small incremental changes”. True, only if small changes are not an excuse for avoiding critical reforms. Will the PSB mergers (more incrementalism) deal with the core issues debilitating PSBs — corruption and lack of incentives? Will they address the fact that borrowers today are far less dependent on PSBs, even if these become better-capitalised and better-governed! Weak bank mergers do not address tomorrow’s challenges of capital, competition and technology. But that’s another story.

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers