The Union Cabinet’s decision on Wednesday to clear the merger of 10 public-sector banks (PSBs) into four ends the prolonged uncertainty over the exercise. Speculation over a possible delay in the merger date arose after the Cabinet didn’t approve the scheme in the three meetings held last month even though it was announced by the finance minister on August 30 last year. Bankers involved in the process were concerned as after the notification, it would usually take 40-45 days for the entities to complete the due processes. Work will now have to be fast-tracked as there is less than a month left before the April 1 deadline for the integration of the balance sheets and shares. The Cabinet’s delay was reportedly because of concerns over the financial results of Bank of Baroda, which absorbed Vijaya Bank and Dena Bank two years ago. The combined entity posted a net loss of Rs 1,407 crore in the third quarter of this financial year, mainly because of higher provisioning. The bank’s fresh slippages rose to around Rs 10,387 crore.
While there is no obvious logic behind the way the finance ministry has identified the merger candidates (for example, three weak banks can’t make one strong big bank), the fact is that an announcement was made about the listed entities and there was no way the government could have gone back on its commitment. After all, the stakeholders in these banks deserve some certainty about the way forward. Now that the decision has been made, it would be useful for the government to consider the real reforms that PSBs badly need at a time when their share in incremental deposits and lending has been falling steadily. The massive erosion in shareholder wealth in PSBs in recent years is a reflection of the failure of the path that PSBs have taken. For example, AU Small Finance Bank, listed less than three years ago, has surpassed Punjab National Bank in market capitalisation even though the latter’s asset book and deposits are many times those of the former. The market capitalisation of Bank of Baroda is also roughly the same as that of the small finance lender.
So it’s now or never as far as PSB reforms are concerned. The real reform that needs to be looked at is in the ownership structure and remuneration of senior management in PSBs. The goal should be to let banks get over the restrictions imposed by state ownership such as low pay, political interference, and the worry of being hounded by investigation agencies. The government should get cracking on vesting bank ownership in a holding company, whose board should appoint the boards of individual banks. The holding company can leverage its capital to inject funds into banks, and shield them from politicians and bureaucrats who meddle with decision- making. It can institute a remuneration structure that rewards the performance of bankers, aligning it with the performance over time of assets that they originate. The approach to reform, and the sequencing of reform, have been very well laid out in the recommendations of the PJ Nayak Committee. However, the government has chosen to pick and choose clauses without trying to understand the spirit in which the recommendations were made.