Rejuvenating ailing banks

Last month, Subbarao suggested that the government should be bold enough to "let certain banks die" and bank "consolidation should be done keeping in mind the interest of minority shareholders and bring in greater autonomy for banks. You should let certain banks die. You should have the boldness to cut the flab, reduce staff and branches." Subbarao's sudden attack on banks is uncalled for and unfortunate, as well. He did not appear to be concerned about the millions of depositors, whose savings are converted into credit or asset by bank management if the government allows some of its stressed banks "die" an unnatural death.

Most commercial banks — state-owned or privately-held — have a very small number of shareholders if compared with their number of depositors. Yet, Subbarao is concerned more about these shareholders than depositors who do not find a mention in his latest treatise on the restructuring of PSBs. What made the former RBI governor come out with such a "bold" idea to let the loss making banks "die" is unclear. It came at a time when the RBI itself is under high financial pressure to manage the adverse impact of demonetisation. Hopefully, the Narendra Modi government will not pay much attention to this former career bureaucrat-turned-RBI governor during the earlier Congress-led United Progressive Alliance (UPA) rule. Subbarao was picked up for the job by his one-time mentor, former finance minister Palaniappan Chidambaram. Assumably, Subbarao's reaction was not prompted by a mischievous WhatsApp message that has been doing the rounds, listing nine state-owned banks that RBI allegedly plans to shut down. The message ends with a warning for readers to manage their cash deposits immediately. This fake message has certainly a dangerous intent to push a run on these PSBs, creating a major chaos to destabilise the government. The former RBI Governor surely knows the import of his frivolous suggestion letting "certain banks to die."

To be honest with the Modi government and present Finance Minister Arun Jaitley, the government began well with the PSB consolidation process with the country's largest bank, State Bank of India (SBI), concluding the merger of its five associate banks, under chairperson Arundhati Bhattacharya, at the beginning of this financial year, protecting the interest of both their depositors and minority shareholders. SBI's five associate lenders were State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Among the associate banks, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore were listed. Not all these associate banks were in the pink of health. The consolidation led to higher NPAs for SBI in its first quarter (April-June, 2017) result. Neither the government, the majority owner, nor the SBI management was perturbed. As expected, SBI took the full liability of depositors with those associate banks.

In fact, the SBI consolidation process should serve as a hallmark for the PSB restructuring programme. The process is hailed by even Moody's, one of the world's two top sovereign rating agencies. Moody's latest note on PSB consolidation clearly said that merger of India's PSBs will provide efficiencies of scale and enhance the quality of corporate governance, However, it noted that infusion of funds from the government will be key for these lenders, many of which have weak capital adequacy. Recently, the government had set up a panel, led by finance minister Arun Jaitley, to consider and oversee mergers among the country's 21 public-sector banks. A consolidation would, no doubt, address some long-standing issues that have contributed to weak corporate governance. "Public-sector banks are the dominant segment of India's banking system, holding around 74 per cent of all deposits. However, with the exception of the State Bank of India, none of the other public-sector banks are large enough to have a competitive advantage. This may change with consolidation, given the potential for some of these banks to grow to levels that exceed even large private sector banks," Moody's said.

Hopefully, the Jaitley panel will work on a process of PSB consolidation that would help solve the capital adequacy problems of weaker banks. The initiative is, no doubt, complex. Experts in the banking industry appreciate that the country's state-owned banking system needs to be consolidated fast to prevent some of the weak banks from becoming weaker. Present RBI governor Urjit Patel too is for a consolidation that will have fewer but healthier entities to deal with the problem of stressed assets. Fortunately, RBI has taken a host of measures since 2016 to resolve the problem of the non-performing assets, including the completion of a comprehensive asset quality review of the banks. And, the finance ministry is open to capital support for facilitating consolidation among state-owned banks, which are reeling under mounting bad loans. Depositors need not be concerned about their hard earned money which they have trusted with the government-controlled banks to manage, for now.IPA