Mergers do not help

Recapitalisation is the only way out for public sector banks

State Bank of India (SBI) Chairperson Arundhati Bhattacharya warned of a “little more pain in the near term” while announcing the bank’s results on Friday. That was enough for the market to respond negatively with the stock slumping over 4 per cent on Monday. As the numbers showed, the “little pain” was a huge understatement — while the bank as a standalone entity reported a profit of Rs 2,800 crore for the fourth quarter and Rs 10,484 crore for the full year, the new consolidated SBI after the merger of four associate banks made a loss of Rs 390 crore for the full year. This is despite five of SBI’s other businesses, including life and general insurance, reporting a cumulative profit of Rs 1,974 crore, up 34 per cent from a year ago. Gross non-performing assets of the consolidated entity jumped to 9.04 per cent, which in absolute terms was Rs 1.79 lakh crore, as against Rs 1.12 lakh crore for the SBI standalone in the fourth quarter. A worryingly large proportion of these dodgy loans, Rs 71,377 crore, have remained doubtful for a period of one to three years. The consolidated bank’s capital adequacy is also weaker because the five associate banks have much poorer ratios.

The performance is in stark contrast to standalone SBI’s sterling show. Profits soared 122 per cent during the quarter and the SBI’s net interest income – the difference between interest earned on loans and interest paid on deposits – rose by 18 per cent, which is the best in the last 10 quarters. Even in terms of asset quality, there was an improvement. Gross non-performing assets as a ratio of total advances declined to 6.90 per cent after peaking at 7.23 per cent in the October-December quarter. The poor numbers of the consolidated bank, however, mean that the SBI’s management will have to expend effort in sorting out problems ensuing from the merger rather than capitalising on the opportunities that lie ahead.

The unfolding SBI story provides several lessons. For one, if mergers were a must, would it not have been better to stagger them over time instead of dumping all the strain on the SBI at one go? While the government and the central bank have repeatedly said that the Indian banking system would be better off if some public sector banks (PSBs) are consolidated to have fewer but healthier entities, the SBI episode yet again shows that mergers are no panacea in Indian banking. Simply merging several laggard PSBs with one big profitable one is more likely to hurt the latter. And if this can happen to one of India’s most efficient state-owned banks, there are justifiable concerns about the government’s plan to merge weak banks with not-so-strong large ones. Policymakers must recognise that there are no shortcuts to rehabilitating banks. The government has tried to boost sectors that account for the biggest sticky loans of state-owned banks, including a recently released policy for increasing steel production and consumption. However, telecommunications and power, with their high levels of debt, continue to be worries. PSBs are also hampered by the fact that while an overwhelming proportion of deposits come to them, they account for a tiny part of the credit expansion. In the end, the government will have to accept that there is no escaping recapitalisation of beleaguered state-owned banks.