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Sick Industries:ALLOW TAKEOVER OF UNITS,by Dr. Vinod Mehta, 10 October 2007 Print E-mail


New Delhi, 10 October 2007

Sick Industries


By Dr. Vinod Mehta

As the economy is booming the problem of sick industrial units has receded into the background but it has not disappeared. Industrial units that are unable to financially sustain themselves are generally called "sick units" in India. A number of studies have revealed that sick units have not only lost their net worth, but they have also lost capital raised from sources other than ownership. Shockingly, the extent of accumulated losses of sick units in the country is about two times that of the net worth of the sick units.

Bluntly, this means that factories are simply abandoned. The owners strip them of everything portable and sneak away in the night. Leaving people with claims against the firm without any remedy. Creditors, suppliers and workers despite or should one say because of their formidable legal protection get nothing.  Far from adding to the growth of the Gross Domestic Product (GDP) they are in fact eating into it. How long can this go on?

Moreover, bank loans to such industrial units have become non-performing assets for some of the lending banks. There is little production in these units, the machine and equipment lies unused and the labour force is idle but gets some payment for doing no work. Not only that. The unit cannot be closed down because of our company and labour laws and these units cannot be taken over by better managements.

Look at the sick textile or jute mills. The Government does not have the money to revive them and the workers would not like them to be taken over by another management in the private sector. The result, scarce funds remain locked and assets remain idle.

A few years back the RBI had reported that the total outstanding bad debt of the sick industries stood at Rs 12,474 crores. Today, this figure might be much higher. If these resources were to be recovered, they could be used to set up power plants and many other infrastructure projects in the country. But in the absence of any exit policy the scarce resources of the country are blocked for the last so many years. Some special package has been announced for the revival of sick textile units but it had very little impact.

In most parts of the world takeover of inefficient units by healthier units is an accepted norm. It is for this reason that there is no concept of "sick industry" in the economic literature of most countries. The production units are either efficient or inefficient but never sick. The inefficient units, which are unable to improve their efficiency, are generally taken over by the healthier units or are allowed to close down.  This saves the society from wasteful investment and ensures efficient use of scarce resources.

It is for this reason that from the very beginning of economic reforms both the domestic and foreign investors have been asking for an exit policy so that if something goes wrong with their investment because of a changed investment climate, altered market scenario etc. they are able to get out of their investment with the least loss. 

The main culprit appears to be India’s archaic Industrial Disputes Act which does not allow easy closure or takeover of sick units. Also, the closure of sick units is decided by the Board of Industrial and Financial Rehabilitation (BIFR). The BIFR process is extremely slow and often takes 10 years or more to decide cases of sick units.

It was hoped that in the absence of any exit policy, the takeover code, which was introduced a few years ago, would substitute for an exit policy. Importantly, it could be used to nurse the sick units back to health, of course, with the change of management. However, the so-called takeover code has miserably failed in tackling the problem of sick industries.

This is not to state that there have been no takeovers in the past.  There have been changes in management in the past but they are of no significance and have been mainly for the existing profit earning units and seldom sick units.  And whatever takeovers have occurred they have never been transparent.

Clearly, the time has come for the Finance Ministry to either come out with the long needed exit policy or make amendments in the existing takeover code and turn it into some kind of an exit policy. In fact, the takeover code if modified and vigorously implemented in the case of sick companies could very well redeem the situation of sick industries.

Under the takeover code the inefficient and mismanaged companies should be openly encouraged to be taken over by the stronger companies. There is no harm if inefficient Indian companies are taken over by foreign companies as it would not only bring foreign capital, the latest technology but also modern management practices.

Additionally, it would encourage companies to efficiently manage their business or risk being taken over by other. This would not only save the exchequer lots of precious funds, the banks saved from the ignominy of non-performing assets and the workers and employees from a shortfall in their income. The financial institutions too would not be required to write off their bad debts or the Government to contribute from the Central budget. Or the sick company should be allowed to go to the highest bidder without any interference from any quarter.

It is common knowledge that the primary capital market has almost dried up for the last almost several years. While the secondary capital market is booming and quite volatile.  Thus, an easy takeover of sick industries might perhaps also have a salutary effect on the capital markets and may contribute to their revival.

The need of the hour is that the Finance Minister tackles the problem of sick industries once and for all. That too in the shortest possible time and enable the country to redeploy the resources to more meaningful areas like infrastructure development. With foreign investors showing interest in investing in India, the time is opportune to allow takeover of sick industries by the healthier domestic and foreign units.

With the economy booming, if necessary the Government could amend the Industrial Disputes Act to make the closure of sick units easier and also make the takeover code more meaningful.  Within the next three to five years there should be no category of sick industrial units in India. ---- INFA

(Copyright India News and Feature Alliance)




Explore Export Potential:BEWARE UNJUST MILK PRACTICES,Dr. Vinod Mehta,3 October 2007 Print E-mail

Economic Highlights

New Delhi, 3 October 2007

Explore Export Potential


By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

A decade ago, India overtook the U.S. as the world's largest milk producer and will retain this position in the coming years. Thanks to the Operation Flood Programme. From producing only 17 million tonnes of milk in 1950-51, the country reached 97 million tonnes in 2005-2006 and is estimated to reach 100 million tonnes for the year 2006-07. More. The projections of milk production is 240 million tonnes in 2020.

However, behind these dry statistics lies the fact that the increased milk production has also brought about a social change in the rural sector. By way of diary cooperatives which have put reasonable earnings in the hands of the poorest of the families owning only one or two cattle. While half of the milk is handled by the farmers’ cooperative societies set up under the National Milk Grid of the National Dairy Development Board (NDDB), the private and cooperative sectors produce the rest.

There are more than 77,500 Diary Cooperative Societies organized in more than 170 milk sheds involving over 10 million farmer members. A major feature of our white revolution is that the Government has ensured that a large percentage of the total milk produced in the country is made available to the general public as fresh liquid milk.

It is, however, feared that with the further opening of the agricultural sector under the WTO agreement all these achievements may be in danger if the Government does not take appropriate measures to protect the consumer as well as the farmer from the “unjust competition” and “unjust practices” of the milk exporting countries. 

The multi-national corporations (MNCs) already operating in India in the fast moving consumer goods sector or the MNCs thinking of entering the country may change the rules of the game and the gains made in the rural sector in the form of social change may be lost. 

Nonetheless, if one goes by the experience of the past four years, these fears appear to be unfounded. The Indian dairy industry need not worry about the MNCs, but should concentrate on capturing a slice of the international market especially for milk-based products like cheese, dahi, ice cream etc., even though it may appear a daunting task today.

Though India is the largest producer of milk in the world but it is not the largest exporter of milk.  According to the data available for the year 2001, the country produced 80.5 million tonnes of milk (the projection for 2002 is 82 million tonnes), followed by USA – 75 million tonnes, Russia –33 million tonnes, Germany – 28 million tonnes, France – 25 million tonnes, New Zealand – 15 million tonnes, Australia – 11 million tonnes, China – 10 million tonnes and Japan – 8.3 million tonnes.

Since milk is a perishable item it is converted into milk powder to increase its shelf life.  The milk powder is then reconverted into liquid milk and some chemicals added to prolong its shelf life.  Apart from the conversion of fresh liquid milk into powder, liquid milk is also converted into various diary products like butter, cheese, butter oil, ghee, ice cream, flavoured milk etc. All these are value added products which fetch high prices for the manufacturer of these products but not for the producers.   This is the normal practice in the developed countries.

With the opening of the agricultural sector, the MNCs may enter the dairy sector in a big way in the coming years. As it stands, two of them, which are already in India, are trying to get a foothold in the Indian dairy market. The cooperative milk sector led by the Gujarat Cooperative Milk Marketing Federation (GCMMF) has taken the competition seriously and is pushing ahead in a big way. 

However, to ensure a level playing field, the MNCs should also be asked to ensure the supply of fresh liquid milk to the Indian consumers before they can market the reconstituted milk or milk products.  The proportion of fresh liquid milk to be marketed by these corporations must be clearly defined.  Again, while marketing fresh milk, they must be asked to clearly state on the carton or pouch whether the milk is fresh milk or reconstituted milk. 

In a situation where the MNCs are likely to enter the milk sector, it is essential to protect the interests of the consumers.  It is common knowledge that most of these companies resort to various kind of undesirable practices to sell their products.  Many a time they resort to a play of words to mislead the public. 

For instance, the reconstituted milk in tetra packs is either described as pure milk or natural milk, which clearly means that it is not fresh liquid milk.  Since people cannot distinguish between fresh liquid milk and reconstituted milk they buy the reconstituted milk as if it is fresh milk.  Again the milk powder they use to reconstitute the milk comes from various sources. 

The time is ripe to put in place strict quality control norms for the sale of milk and milk products, both for the domestic and the international market. It is, thus important that, as a first step, the Government makes it mandatory that every packet of milk and milk product should carry the exact information whether a particular product is made from fresh milk or reconstituted milk etc.

If reconstituted milk has been made from imported milk powder then the information regarding the source and origin of milk powder must be printed on the carton. Similarly, if packed curd, paneer, cheese, etc. are being made from reconstituted milk the people have a right to know that this is so.  If any preservatives and chemicals have been added that should also mentioned on the carton.

After having met the liquid milk needs of the domestic consumer, the milk producers are now going in for value added products like butter, cheese, curd, ice cream in a big way. It was feared that such a move would lead to an increase in the prices of milk and milk products, but surprisingly, the prices of milk and milk products have remained relatively stable in the past three years.  This is to the credit of our dairy cooperatives.

Now the cooperative dairy sector as well as the domestic private dairy sector should slowly look at the foreign markets where the prices are quite remunerative for butter, cheese, ice-cream etc. Sometime back the GCMMF had taken a lead by exporting large quantities of liquid milk to Singapore every day.

It is now eyeing the milk markets of Thailand, Malaysia and Indonesia. The day may not be far when India may export milk to China also. But all this depends upon the quantity of fresh milk we can spare after meeting our domestic demand. They should also enter the international market for dairy products.

It should also be understood that in most of the countries the farmers get large amounts of subsidies to maintain the production of milk at a certain level.  This factor should be taken into account while allowing foreign companies to sell milk and milk products in India by levying appropriate customs duties.

With the project patent regime coming into force from January 2005 all dairy processes and products have become patentable. We should move fast to patent our processes and products to ensure we are not edged out of our own market.  For instance, India has perfected the processes of producing milk powder and cheese from buffalo’s milk. This needs to be patented immediately if not done so far. This is important if we have to develop and sustain international markets for our milk and milk products.

In the new WTO regime, India must keep its edge over milk production and should aim to emerge as the largest exporters of milk and milk products. For this we need not rear more cattle but increase the milk yield through better feed to cattle and by improving the pedigree of cattle stock. Also, we must enforce stringent quality norms that conform to international standards for the marketing of milk and milk products, both in India and abroad. ---- INFA

(Copyright India News and Feature Alliance)





The MRP Scandal:CONSUMERS TAKEN FOR A RIDE, by Dr.Vinod Mehta,20 September 2007 Print E-mail

Economic Highlights

New Delhi, 20 September 2007

The MRP Scandal


By Dr.Vinod Mehta

(Former Director, Research, ICSSR)

There are certain things which the Government starts in good faith, at a certain point of time depending upon a given situation but does not know what to do with it when it has outlived its utility.  One such thing is the “maximum retail price” requirement or MRP in short.

During the seventies when there were severe shortages of essential commodities and prices were skyrocketing, a notification was issued that all the packaged goods would carry the MRP tag so that the skyrocketing prices could be arrested.  Apart from essential commodities like edible oil, sugar etc., all other not-so-essential items like soap bars, hair oils, shampoos, biscuits, chocolates, shoes, shirts, jeans, music systems etc. were also covered by this notification. 

For quite a number of years it served the purpose well.  But one thing, which everybody missed, was that the MRP was always set higher than what was warranted; and it continues to be so even today.

However, in the past 15 years the supply position of many non-farm goods has completely changed for the better. The end of license raj has enabled the country to create adequate production capacities for a large number of goods, both fast moving consumer goods like soaps and shampoos and durable consumer goods like TVs, refrigerators, cameras etc. 

Moreover, the liberal import policies have helped bring in many consumer goods to India, which in turn has improved the availability of a large number of consumer goods.  In fact, the competition for selling goods has become so intense as also the pressure for prices to move downwards which has made the MRP requirement redundant for a number of goods.

Take for instance a packet of potato wafers with a MRP of Rs.20. An individual store will sell it for Rs.20 only. But our supermarkets are full of advertisements saying, “buy one get one free.” It means that one can buy two packets of potato wafers for Rs.20 or at Rs.10 each. It also means that by selling a packet of potato wafers for an effective price of Rs.10 the seller is still making profit. Questionably, why then should the MRP be Rs. 20 when the effective market price is Rs.10? On which the seller is still making a profit?

This is true of a large number of products like shirts, trousers, shampoos, biscuits and so on. If a seller sells a shirt for Rs.800 and is willing to give one free then why force the consumer to buy two shirts under the garb of “buy one get one free” when the effective price of one shirt is Rs.400 only?

Under the MRP garb sellers are resorting to many other gimmicks. Camera sellers are happy to sell you a digital camera at a MRP of Rs.10,000 with a free gift of a pen drive worth Rs. 2,000. The question is why not sell the camera for Rs.8,000 which appears to be the effective market price? Similarly, if you buy a colour TV you get a DVD player free; why not sell the TV and DVD players as separate items at effective market prices?

The ridiculous part of the whole thing is that even goods like shoes, jeans, watches etc. carrying foreign brand names and bought generally by rich people are also supposed to carry the MRP tag. If a person can buy a pair of foreign branded shoes for Rs.2,500 he can very well pay Rs.5,000 or even Rs.10,000 for a similar pair. What does a MRP mean to that person? What kind of a person are we protecting from the price rise?

The point is that there is a downward pressure on the prices of a large number of manufactured products but this MRP tag, which has a large built-in profit margin is keeping the prices at unsustainable higher levels. The intense competition and large production capacities will ensure low and competitive prices without the MRP tag. In fact, the prices will find their market level which will be more realistic than the one indicated by the MRP tag. Clearly, the MRP is no more relevant now.

Look at it from another angle. Have you ever come across a MRP for farm produce? One can never have a MRP for farm produce; it fluctuates from region to region and from season to season depending upon the demand and supply situation. The Government can intervene in the market by way of a minimum support price or subsidies to make available grain to poor people at reasonable prices which is not the same thing as a MRP.

A large number of products like mithai which sells loose and by weight by individual shops never carries a MRP tag but their prices at these shops are more or less the same.  The reason is competition. It puts the pressure on the shop owners to keep their prices competitive otherwise similar products with higher prices will not sell. There are a large number of other products like biscuits, detergent powder, pickles etc, which are sold loose and by weight and they never carry a MRP tag and yet the prices have remained relatively stable and below the MRP tag over the years.

Therefore, except for a few sensitive essential packaged products like cooking oil, sugar, pulses etc, the MRP requirement can be done away with without any fear of price rise.  We have entered the era of price wars where the sellers are willing to increase their profits by selling large volumes rather than selling less at a very high profit as was the case in the seventies. In the current scenario producers who are not willing to sell volumes at relatively low margins will not survive in the competitive environment.

To begin with the manufactured products, instead of a MRP, may carry the ex-factory price tag plus the excise duty paid on it to give a fair idea of the price charged by the seller. This tag can also be discarded after two to three years. Similarly, the imported manufactured goods must carry the landed price of the good plus the customs duty paid on it which will provide a fair idea to the consumer about the final price charged by the seller in India. The other requirements like date of manufacture and expiry date on packaged food items produced in the country as well as imported must continue.

In most countries there is no requirement of a MRP for packaged manufactured products yet the prices are stable. The individual shops/supermarkets display their own price labels, which may vary from shop to shop by small margins. These shops/supermarkets also resort to “buy one get one free” gimmicks but for those products which they have either not been able to sell or where the expiry date has come close. However, the clearance is not on an artificially fixed higher price but on the already labelled price which is known to the consumer.

In short, one can say that the time has come to do away with the MRP requirement as it is only serving the purpose of keeping prices high at a time and in a situation where there is a downward pressure on prices of manufactured products. The price wars will keep the prices under check. The only thing is to keep a watchful eye on price cartels, which will be the task of the Competition Commission of India. ----INFA

(Copyright India News and Feature Alliance)


Competition Commission Set Up:PROTECTING CONSUMER INTERESTS, by Dr. Vinod Mehta,13 September 2007 Print E-mail


New Delhi, 13 September 2007

Competition Commission Set Up


By Dr. Vinod Mehta

(Former Director (Research) ICSSR

Competition, say economists, ensures low prices and quality products to consumers.  But in a market economy there are always dangers that the producers would try to restrict competition overtly or covertly to maximize their profits.

It may take the form of price collusion like the recent decision of cell phone companies to jack up the SMS rates or narrow down the purchase options of consumers by taking over a similar business as is the case of Kingfisher airline acquiring the low fare Air Deccan. By this move the option of low fare tickets is gone for the consumer.

Matured market economies like the American or European are aware of these tactics of the producers and have put in place well set mechanisms to protect the interests of their consumers.  In the USA it is called the Federal Trade Commission (FTC), in the UK it is the Competition Commission and in Australia it is called the Competition and Consumer Commission.

The FTC deals with issues that touch the economic life of every American. It is the only federal agency with both consumer protection and competition jurisdiction in the broad sectors of the economy. The FTC pursues vigorous and effective law enforcement; advances consumers’ interests by sharing its expertise with Federal and State legislatures and U.S. and international government agencies.

It also develops policy and research tools through hearings, workshops, and conferences and creates practical and plain-language educational programmes for consumers and businesses in a global marketplace with constantly changing technologies

The FTC’s Bureau of Competition champions the rights of the American consumers by promoting and protecting free and vigorous competition. The Bureau: reviews mergers and acquisitions, and challenges those that would likely lead to higher prices, fewer choices, or less innovation.

It seeks out and challenges anti-competitive conduct in the marketplace, including monopolization and agreements between competitors; promotes competition in industries where consumer impact is high, like health care, real estate, oil & gas, technology, and consumer goods; provides information, and holds conferences and workshops, for the consumers, businesses and policy makers on competition issues and market analysis.

The Bureau of Competition is also committed to preventing mergers and acquisitions that are likely to reduce competition and lead to higher prices, lower quality goods or services, or less innovation. In most cases, the Bureau receives notice of proposed mergers under the Hart-Scott-Rodino (HSR) Amendments to the Clayton Act.

Bureau lawyers, along with economists from the FTC's Bureau of  Economics, investigate market dynamics to determine if the proposed merger will harm the consumers. When necessary, the FTC may take formal legal action to stop the merger, either in a Federal court or before an FTC administrative law judge.

The Competition Commission in UK is an independent public body, which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. The Competition Commission was established by the Competition Act 1998. It replaced the Monopolies and Mergers Commission on 1 April 1999. 

Like FTC of USA, the Competition Commission of UK also conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries. Every inquiry is undertaken in response to a reference made to it by another authority: usually by the Office of Fair Trading (OFT) but in certain circumstances the Secretary of State, or by the regulators under sector-specific legislative provisions relating to regulated industries. The Commission, however, has no power to conduct inquiries on its own initiative.

Now with the passing of the Competition (Amendment) Bill, 2007 last week India has also joined the league of matured market economies to protect the interests of the consumers and promote competition in the economy.  (The Competition Act was enacted by the Parliament in 2002 but due to some reservations could not be implemented).  

The new body will be known as the Competition Commission of India (CCI) and will replace the Monopolies and Restrictive Trade Commission (MRTPC) of the license raj era.  While the job of the MRTPC was to stop the emergence of monopolies, the task of the CCI will be to ensure competitive conditions in the market. 

The CCI as an expert body will function as a market regulator to prevent and regulate anti-competitive practices and would have advisory and advocacy functions in its role as a regulator. It will also look into mergers and acquisitions of companies in India.

Mergers and acquisitions of similar businesses are becoming very important.  Before this Amendment was finally passed we have witnessed three important mergers of airlines: one, merger of Air Deccan with Kingfisher, two, of Jet Airways with Sahara and the merger of State owned airlines Air India and Indian Airlines. 

Had the CCI been in place a few months earlier all these mergers would have been first referred to it to see if these were in the best interests of the consumers or whether they would restrict competition and lead to higher airfares which are inimical to the interests of the consumers.  Since these mergers are now a reality the CCI cannot do anything about it.

However, on the positive side many small players at the regional level are waiting in the wings to start their airlines. Which are likely to ensure competition in the airlines business.

That apart, each merger and acquisition may not restrict competition and always harm the consumer interest.  Each case will have to be dealt with separately on its own merit and within the context of the industry concerned. 

For instance, acquisition of an ailing business by a stronger one may actually help the weaker one to get rehabilitated.  This could have been the case with some textile units or public sector units manufacturing drug or photo film which were forced to close down as they were not allowed to be acquired by healthier firms.  Had the acquisition and mergers of these units been allowed as a policy we wouldn’t have been saddled with a large number of sick units today.

But we have to be very careful about the mergers, price collusion  of new businesses such as cell phone companies which are known for restrictive trade practices, covert price collusions etc the world over. As also air lines, drug manufacturers, car manufacturers, fast moving consumer goods and so on. 

The CCI is going to have the onerous task on its hands in the coming years.  How far it will succeed in its task of protecting the interests of the Indian consumers depends largely on developing its expertise in such matters.  

The Competition Commissions the world over have appointed economists, financial analysts and legal experts to help them in nailing down industries which restrict competition and fleece the consumer.  We also have such expertise available in the country and now it all depends upon the Commission to make the right selections and start the work. ---- INFA

(Copyright India News & Feature Alliance)





Don’t Play Politics:CREATE MEGA BANKS, by Dr Vinod Mehta, 5 September 2007 Print E-mail


New Delhi, 5 September 2007

Don’t Play Politics


By Dr Vinod Mehta

(Former Director, Research, ICSSR)

The Government has been mulling over the idea of merging the State Bank of India with its seven associate banks for the past few years to create a mega bank. So that it can withstand competition from other banks and play an active role in the international banking business.  In fact, it also wishes other Public Sector banks to take the initiative to merge and emerge as mega banks of international standard.

However, the Government has hesitated to move forward on its proposal because of strong opposition from a few political parties and trade unions. Globalization demands we have six to seven strong mega Indian banks which can not only withstand competition from mega international banks but also play a significant role in the international financial markets.

The shares of the State Bank of India which were held by the Reserve Bank of India have now been transferred to the Government of India.  The Government is now in a position to offload a part of it in the equity market.  But it can realize a better price if the associate banks of the State Bank of India like the State Bank of Saurashtra, the State Bank of Patiala etc. are merged with the main bank.

Notwithstanding, the associate banks have been there for historical reasons but have all been functioning under the State Bank of India’s administrative control. Therefore by merging the associates with the State Bank of India prior to offloading a small part of its equity in the equity market the Government would kill two birds with one stone: Create a mega bank and get maximum value for its equity.

This also holds true for other nationalized and private sector banks. In the next three to four years a number of foreign banks will enter India thus the Indian banks too should be ready to enter foreign countries.  In fact, the Narasimham Committee in its Second Report on Banking Sector Reforms, more than a decade ago, had set the tone for the creation of mega banks by suggesting many sweeping changes in the banking sector with a view to bringing them on par with the international banks. 

The Report covered all the important aspects ranging from bank mergers to the creation of global sized banks. While making these recommendations, the Committee had kept in view the inevitable capital account convertibility, which was likely to result in large inflows and outflows. Also, the attendant implications for exchange rate management and domestic liquidity which only very large banks were capable of handling.  The time is now ripe to implement the recommendations of the Narasimham Committee with some modifications keeping in view the changes that have occurred in the banking sector in the past one decade. 

It has been stated in this column on several occasions earlier that the finance sector, which was to be reformed at a much faster pace is the one which is still lagging behind.  None of the present Indian banks is able to on their own stand internationally or to ward of the threat of take-over by foreign banks.  They are surviving because of the Government backing.  All over the world the strong banks have joined hands or are joining hands to become mega banks so that they can stand the international competition and manage the flow of funds in a better way.

Remember, more than a decade ago two Japanese banks, namely the Bank of Tokyo (which had more international presence) and the Mitsubishi Bank (which had more national presence) merged to become the Bank of Tokyo-Mitsubishi. At that time the Bank of Tokyo-Mitsubishi with assets totaling around US $647.781 billion was the largest bank in the world. 

The second largest bank in the world, in terms of assets is the Deutsche Bank followed by the Credit Auricle, the Sumitomo Bank and the Industrial and Commercial Bank of China.  If India's largest bank, the State Bank of India, joins hands with its seven associate banks even then in terms of assets it would rank 129th bank in the world.

Again if one were to merge, say, the Bank of India, the Corporation Bank and the Oriental Bank of Commerce, the merged entity would perhaps rank 331st in the world in terms of assets.  All this is to state that we do not have a single bank of international dimension.  It will take perhaps 8 to 10 years from now for a few Indian strong banks to emerge as a bank of international dimension, provided some of them are merged now.

It is in this context that we have to see the recommendation of the Second Narasimham Committee Report.  The Committee was against forced mergers between strong and weak banks as it feared the weak bank would pull down the stronger bank as was seen in the merger of the New Bank of India with the Punjab National Bank more than a decade ago. 

Politically, it may be difficult for the Government to close down the loss making banks but it will have to take stern measures in this direction. Either the loss making banks should accept the rehabilitation package worked out by the Government or else accept their closure. The Government cannot afford to save them all the time by diverting the tax payers’ hard earned money.  Had these banks been in the private sector they would have closed down by now. 

One of the reasons for the rut in the banking sector is the equalization of pay-scales of various levels of bank employees in the nationalized banking sector.  Such an approach does not make any distinction between an efficient and inefficient employee.  Therefore, it hardly matters whether the bank is earning profit or making losses since the employees are ensured of their pay in the regular scale. After the submission of the Narasimhan Report the bank employees have again threatened that they will resort to nationwide strikes if any attempt is made by the Government to close down loss making branches of a bank or loss making banks themselves. 

It may be observed that the bank employees are using their monopoly power to hold the nation to ransom by refusing to cooperate with the Government in the implementation of financial sector reforms. Despite the Government’s assurance that none of the existing employee would be forcibly retired.  If the employees still adopt a stubborn attitude and do not cooperate in the implementation of the reforms, the Government should take a very strong stand and action against the employees within the legal framework.

The change in the functioning of the banks as well as their restructuring is inevitable because of the sweeping technological changes in the banking industry all over the world.  With the advances in information technology, computer technology etc. the concept of a bank branch has become totally irrelevant. 

Again with the costs of real estate going up the everyday maintenance of separate bank branches is eating into the potential profits of the banks.  All over the world bank branches are giving way to ATMs and internet banking for carrying out a number of the banking transactions. Then there are big financial deals to be arranged like the purchase of Corus Steel by Tatas.  All these are reasons enough for creation of mega banks.

Some of the private sector banks which came up after 1991 have merged like the Centurian Bank and the Bank of Punjab to become the Centurion Bank of Punjab. It is now reported that the Lord Krishna Bank has merged with the Centurian Bank of Punjab. But this is a merger of three relatively smaller private banks. What we need is the merger of strong public sector banks to create mega banks.

With the economy being sucked into the vortex of globalization many mega international banks are looking for acquisitions in India. Before that happens we must facilitate the merger of strong public sector banks to enable them to become strong mega banks which can stand up to international banks. ---- INFA

 (Copyright India News & Feature Alliance)


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